Reading 48: Market-Based Valuation: Price Multiples - LOS require, investment, class, percent, reasonable

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1.A firm has a payout ratio of 40 percent, a profit margin of 7 percent, an estimated growth rate of 10 percent, and its shareholders require a return of 14 percent on their investment. Based on these fundamentals, a reasonable estimate of the appropriate price-to-sales ratio for the firm (based on trailing sales) is:

A)   0.56.

B)   0.70.

C)   0.85.

D)   0.77.

2.What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 65 percent if the shareholders require a return of 10 percent on their investment and the expected growth rate in dividends is 6 percent?

A)   16.25.

B)   9.28.

C)   8.75.

D)   17.23.

3.What is the justified leading price-to-earnings (P/E) multiple of a stock that has a retention ratio of 60 percent if the shareholders require a return of 16 percent on their investment and the expected growth rate in dividends is 6 percent?

A)   4.00.

B)   4.24.

C)   6.36.

D)   2.50.

4.The Farmer Co. has a payout ratio of 65 percent and a return on equity (ROE) of 16 percent (assume that this is expected ROE for the upcoming year). What will be the appropriate price-to-book value (PBV) based on return differential if the expected growth rate in dividends is 5.6 percent and the required rate of return is 13 percent?

A)   0.71.

B)   1.48.

C)   3.47.

D)   1.41.

5．What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40 percent if the shareholders require a return of 16 percent on their investment and the expected growth rate in dividends is 6 percent?

A)   4.00.

B)   6.36.

C)   2.50.

D)   4.24.

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答案和详解如下：

1.A firm has a payout ratio of 40 percent, a profit margin of 7 percent, an estimated growth rate of 10 percent, and its shareholders require a return of 14 percent on their investment. Based on these fundamentals, a reasonable estimate of the appropriate price-to-sales ratio for the firm (based on trailing sales) is:

A)   0.56.

B)   0.70.

C)   0.85.

D)   0.77.

The correct answer was D)

P S

=

payout x profit margin x (1 + g) r - g

=

.40 x (.07) x (1.10) .14 - .10

= 0.77

2.What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 65 percent if the shareholders require a return of 10 percent on their investment and the expected growth rate in dividends is 6 percent?

A)   16.25.

B)   9.28.

C)   8.75.

D)   17.23.

The correct answer was D)

P₀/E₀ = (0.65 × 1.06) / (0.10 – 0.06) = 17.225

3.What is the justified leading price-to-earnings (P/E) multiple of a stock that has a retention ratio of 60 percent if the shareholders require a return of 16 percent on their investment and the expected growth rate in dividends is 6 percent?

A)   4.00.

B)   4.24.

C)   6.36.

D)   2.50.

The correct answer was A)

P₀/E₀ = 0.40 / (0.16 – 0.06) = 4.00

4.The Farmer Co. has a payout ratio of 65 percent and a return on equity (ROE) of 16 percent (assume that this is expected ROE for the upcoming year). What will be the appropriate price-to-book value (PBV) based on return differential if the expected growth rate in dividends is 5.6 percent and the required rate of return is 13 percent?

A)   0.71.

B)   1.48.

C)   3.47.

D)   1.41.

The correct answer was D)

Based on return differential:

P₀/BV₀ = (ROE₁ - g) / (r - g) = (0.16 - 0.056) / (0.13 - 0.056) = 1.41.

5．What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40 percent if the shareholders require a return of 16 percent on their investment and the expected growth rate in dividends is 6 percent?

A)   4.00.

B)   6.36.

C)   2.50.

D)   4.24.

The correct answer was D)

P₀/E₀ = (0.40 × 1.06) / (0.16 – 0.06) = 4.24