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标题: Equity Valuation【 Reading 39】Sample [打印本页]
作者: HuskyGrad2010    时间: 2012-3-30 17:43     标题: [2012 L2] Equity Valuation【Session 11- Reading 39】Sample

Multi-stage growth models can become computationally intensive. For this reason they are often referred to as:
A)
spreadsheet models.
B)
quadratic models.
C)
R-squared models.


The computationally intensive nature of these models make them a perfect application for a spreadsheet program, hence the name spreadsheet models.
作者: HuskyGrad2010    时间: 2012-3-30 17:43

Historical information used to determine the long-term average returns from equity markets may suffer from survivorship bias, resulting in:
A)
deflating the mean return.
B)
unpredictable results.
C)
inflating the mean return.


Survivorship bias refers to the weeding out of underperforming firms, resulting in an inflated value for the mean return.
作者: HuskyGrad2010    时间: 2012-3-30 17:44

Which of the following is least likely a limitation of the two-stage dividend discount model (DDM)?
A)
use of one required rate of return for both stages might overstate the value.
B)
most of the value is due to the terminal value, which is very sensitive to the estimates of stable growth.
C)
the length of the high-growth stage is difficult to measure.


The two-stage DDM uses a different required rate of return (cost of equity) for high-growth period (r) and steady state (rn). Most of the time r > rn, since during the stable period the firm is less risky and shareholders require a lower rate of return
作者: HuskyGrad2010    时间: 2012-3-30 17:44

If an investor were attempting to capture an asset’s alpha returns, the expected holding period return (HPR) would be:
A)
higher than the required return.
B)
lower than the required return.
C)
the same as the required return.


Alpha returns are returns in addition to the required returns, so the expected HPR would be higher than the required return.
作者: HuskyGrad2010    时间: 2012-3-30 17:44

an asset was fairly priced from an investor’s point of view, the holding period return (HPR) would be:
A)
equal to the alpha returns.
B)
lower than the required return.
C)
the same as the required return.


A fairly priced asset would be one that has an expected HPR just equal to the investor’s required return.
作者: HuskyGrad2010    时间: 2012-3-30 17:46

Flyaweight Foods is a vertically integrated producer and distributor of low-calorie food products operating on a consumer club model. They have enjoyed rapid growth in the southwest United States during their 5-year history and are planning rapid expansion throughout the rest of the country. To fund their expansion, they are soliciting investments from a variety of venture capital groups.
One of the groups considering a bid for Flyaweight is Angelcap Investors, a private equity fund run by Harry Moskowitz. Angelcap is interested in acquiring a 10% interest in Flyaweight.  Moskowitz’ partner, Bill Sharpless, runs the group doing due diligence on Flyaweight. He provides Moskowitz with financial data on the firm:

Table 1: Flyaweight Foods Historical Data
(Dollars per share)


FY1

FY2

FY3

FY4

FY5


Sales per share

4.25

5.60

6.40

7.35

8.05


EPS

1.20

1.85

2.30

2.79

3.10


Dividends

0

0

0.10

0.20

0.35


Free Cash Flow

-2.50

-2.10

-1.85

-1.60

-1.25


Moskowitz suggests that a Dividend Discount Model (DDM) would be an appropriate means for valuing Flyaweight because Angelcap would be a minority shareholder. Sharpless points out that the primary advantage of using a DDM is that dividends are more stable than earnings or cash flow.
They ask Merle Muller, an analyst at the firm, to calculate an appropriate required return on Flyaweight. Muller collects the following market consensus information:

Table 2: Current Market Conditions
(Consensus estimates)


Expected 5-year EPS growth
8.0%

Expected 1-year Dividend yield
2.2%

Current Treasury yield (10-year note)
4.8%

Food industry beta (specialty segment)
0.95

Muller says, “If we assume that the beta for Flyaweight should equal the beta of the specialty food industry, then our required rate of return in less than 10%.” Moskowitz disagrees strongly with using a discount rate that low and insists on using a multi-factor model such as the Arbitrage Pricing Theory (APT) instead. Sharpless disagrees that the APT will solve the estimation problem, pointing out, “A principal limitation of both the Capital Asset Pricing Model (CAPM) and the APT is uncertainty about the correct measurement of the market and factor risk premiums.”
Sharpless argues in favor of using the Gordon Growth Model (GGM). “We know what the company growth rate is, we know what the dividend is, and we can decide what our required rate of return is. The GGM will give us the most accurate valuation because it uses the inputs we can measure most accurately.” Moskowitz points out, “An H-model would be more appropriate because it assumes a linear slowdown in growth to a constant rate in perpetuity.”
While Sharpless and Moskowitz debate the appropriate valuation approach, Muller prepares forecasts for Flyaweight.

Table 3: Forecast Values for Flyaweight


Forecast


Average total liabilities per share

$14.40


Average owners’ equity per share

$12.70


Profit margin

29%


Sales per share

$10.70


Dividend payout ratio

10%

Judging by the data in Table 1, the most appropriate method for valuing Flyaweight would be:
A)
justified P/E because it is a high-growth company.
B)
residual income because the firm is likely to have high capital demands and negative cash flow for the foreseeable future.
C)
the DDM because the firm has a history of dividend growth.


A residual income model is appropriate for firms with long term negative free cash flow due to high capital demands. A DDM would not be appropriate since the dividend payout ratio is fluctuating widely. Justified P/E is not a preferred valuation method for high-growth companies because it assumes a constant growth rate in perpetuity. (Study Session 11, LOS 39.a)
Regarding their statements about calculating a required rate of return for Flyaweight:
A)
both are correct.
B)
only Muller is correct.
C)
only Sharpless is correct.


Sharpless is correct that uncertainty surrounding estimates of inputs and risk premiums is a key limitation of both the CAPM and the APT. Muller is correct that the required rate of return on Flyaweight is less than 10% if the beta of the specialty foods industry is used:

Equity risk premium:

one-year dividend growth + long-term EPS growth − long-term risk free rate
Equity risk premium = 2.2% + 8.0% – 4.8% = 5.4%

Thus the required rate of return is:

Required rate of return = Risk free rate + (beta × market risk premium)
Required rate of return = 4.8% + (0.95 × 5.4)
Required rate of return = 9.9%

(Study Session 10, LOS 35.b, c, d)

With respect to their statements about the use of the GGM and the H-model:
A)
both are correct.
B)
only Moskowitz is correct.
C)
only Sharpless is correct.


Moskowitz is correct that an H-model assumes a linear slowdown in growth until a constant growth rate is achieved. Sharpless is incorrect that the GGM would be an appropriate technique for valuing Flyaweight because the GGM assumes a constant rate of growth in perpetuity and Flyaweight has not yet reached a constant growth rate. (Study Session 11, LOS 39.h, i)
Which of the following is least likely to be a characteristic of a company in the initial growth phase?
A)
Low dividend payout ratio.
B)
High profit margin.
C)
Return on equity equal to the required rate of return.


Companies in the initial growth phase tend to have a return on equity higher than the required rate of return, along with high profit margins and a low dividend payout. (Study Session 11, LOS 39.j)
With respect to their statements about the use of DDMs:
A)
only Moskowitz is correct.
B)
only Sharpless is correct.
C)
both are correct.


Moskowitz’ statement is correct. A dividend discount approach is most appropriate when the perspective is that of a minority shareholder. Sharpless’ statement is incorrect because the primary advantage of a DDM is that it is theoretically justified. The stability of dividends is an additional advantage. (Study Session 11, LOS 39.a)

Based on the forecast data in Table 3, Flyaweight’s sustainable growth rate (SGR) is closest to which value? If asset turnover were to rise from the forecast level, what would be the impact on SGR?  
SGRImpact on SGR
A)
24%Increase
B)
22%Increase
C)
22%Decline


Note that total assets for the firm must equal total liabilities plus owners’ equity, so assets are ($14.40 + $12.70) = $27.10.

Thus the Return on Equity (ROE) of the firm equals:

ROE = profit margin × asset turnover × financial leverage
ROE = (0.29) × ($10.70 / $27.10) × ($27.10 / $12.70)
ROE = 0.244 = 24.4%
ROE will rise as asset turnover rises.

The SGR of the firm equals:

SGR = retention rate × ROE
SGR = (1 – 0.10) × 0.244
SGR = 0.90 × 0.244
SGR = 0.22
The SGR of the firm is approximately 22%.
SGR will increase as rising asset turnover increases ROE.

(Study Session 11, LOS 39.n)
作者: HuskyGrad2010    时间: 2012-3-30 17:46

Free cash flow to equity models (FCFE) are most appropriate when estimating the value of the firm:
A)
to creditors of the firm.
B)
to equity holders.
C)
only for non-dividend paying firms.


FCFE models attempt to estimate the value of the firm to equity holders. The models take in to account future cash flows due to others, including debt and taxes, and amounts required for reinvestment to continue the firm’s operations.
作者: HuskyGrad2010    时间: 2012-3-30 17:47

Which of the following dividend discount models has the limitation that a sudden decrease to the lower growth rate in the second stage may NOT be realistic?
A)
Gordon growth model.
B)
H model.
C)
Two-stage dividend discount model.


The two-stage DDM has the limitation that a sudden decrease to the lower growth rate in the second stage may not be realistic. Further, the model has the difficulty in trying to estimate the length of the high-growth stage.
作者: HuskyGrad2010    时间: 2012-3-30 17:47

The H-model is more flexible than the two-stage dividend discount model (DDM) because:
A)
initial high growth rate declines linearly to the level of stable growth rate.
B)
payout ratio changes to adjust the changes in growth estimates.
C)
terminal value is not sensitive to the estimates of growth rates.


A sudden decline in high growth rate in two-stage DDM may not be realistic. This problem is solved in the H-model, as the initial high growth rate is not constant, but declines linearly over time to reach the stable-growth rate.
作者: HuskyGrad2010    时间: 2012-3-30 17:48

the three-stage dividend discount model (DDM) results in extremely high value, the:
A)
growth rate in the stable growth period is probably too high.
B)
growth rate in the stable growth period is lower than that of gross national product (GNP).
C)
transition period is too short.


If the three-stage DDM results in an extremely high value, either the growth rate in the stable growth period is too high or the period of growth (high plus transition) is too long. To solve these problems, an analyst should use a growth rate closer to GNP growth and use shorter high-growth and transition periods.
作者: HuskyGrad2010    时间: 2012-3-30 17:49

The H model will NOT be very useful when:
A)
a firm has a constant payout policy.
B)
a firm is growing rapidly.
C)
a firm has low or no dividends currently.


The H model is useful for firms that are growing rapidly but the growth is expected to decline gradually over time as the firm gets larger and faces increased competition. The assumption of constant payout ratio makes the model inappropriate for firms that have low or no dividend currently.
作者: HuskyGrad2010    时间: 2012-3-30 17:49

Multi-stage dividend discount models can be used to estimate the value of shares:
A)
only when the growth rate exceeds the required rate of return.
B)
only under a limited number of scenarios.
C)
under an almost infinite variety of scenarios.


Multi-stage dividend discount models are very flexible, allowing their use with an almost infinite variety of growth scenarios.
作者: HuskyGrad2010    时间: 2012-3-30 17:50

Which of the following is least likely a potential problem associated with the three-stage dividend discount model (DDM)? The:
A)
beta in the stable period is too high, resulting in an extremely low stock value.
B)
high-growth and transitional periods are too long, resulting in an extremely high stock value.
C)
stable period payout ratio may be too high resulting in an extremely low value.


If the stable period payout ratio is too low it may result in an extremely low value because the terminal value will be lower due to the smaller dividends being paid out.
作者: HuskyGrad2010    时间: 2012-3-30 17:51

One of the limitations of the dividend discount models (DDMs) is that:
A)
they are very sensitive to growth and required return assumptions.
B)
they are conceptually difficult.
C)
given the inputs, they are not very precise in their valuations.


DDMs are very sensitive to the growth and required return assumptions, and it is often wise to interpret the value as a range rather than a precise dollar amount.
作者: HuskyGrad2010    时间: 2012-3-30 17:52

The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):
A)
has little practical effect because they are both very close.
B)
was settled by the work of Harry Markowitz in 1972.
C)
limits its usefulness in estimating the required return of an asset.


There are several characteristics of the CAPM that limit its usefulness in determining the required returns, including the uncertainty whether we should use arithmetic or geometric means as the appropriate measure of long-term average returns
作者: HuskyGrad2010    时间: 2012-3-30 17:52

The volatility of equity returns requires us to use data from long time periods to compute mean returns. One problem that this causes is that:
A)
inflation alters the value of the past returns.
B)
the past is rarely an indication of the future.
C)
equity premiums vary over time with perceived risk.


The primary problem with using returns gathered over a long time period is that equity premiums vary over time with the market’s perception of risk and relative risk.
作者: HuskyGrad2010    时间: 2012-3-30 17:52

If an investor had determined that an asset’s market price was too high, (implying that it will soon fall) the expected holding period return (HPR) would be:
A)
equal to the required return.
B)
lower than the required return.
C)
higher than the required return.


If the investor determined that the asset’s price was too high, then the expected HPR would be less than the required return, and the asset would have a negative alpha.
作者: HuskyGrad2010    时间: 2012-3-30 17:53

Julie Davidson, CFA, has recently been hired by a well-respected hedge fund manager in New York as an investment analyst. Davidson’s responsibilities in her new position include presenting investment recommendations to her supervisor, who is a principal in the firm. Davidson’s previous position was as a junior analyst at a regional money management firm. In order to prepare for her new position, her supervisor has asked Davidson to spend the next week evaluating the fund’s investment policy and current portfolio holdings. At the end of the week, she is to make at least one new investment recommendation based upon her evaluation of the fund’s current portfolio. Upon examination of the fund’s holdings, Davidson determines that the domestic growth stock sector is currently underrepresented in the portfolio. The fund has stated to its investors that it will aggressively pursue opportunities in this sector, but due to recent profit-taking, the portfolio needs some rebalancing to increase its exposure to this sector. She decides to search for a suitable stock in the pharmaceuticals industry, which, she believes, may be able to provide an above average return for the hedge fund while maintaining the fund’s stated risk tolerance parameters.
Davidson has narrowed her search down to two companies, and is comparing them to determine which is the more appropriate recommendation. One of the prospects is Samson Corporation, a mid-sized pharmaceuticals corporation that, through a series of acquisitions over the past five years, has captured a large segment of the flu vaccine market. Samson financed the acquisitions largely through the issuance of corporate debt. The company’s stock had performed steadily for many years until the acquisitions, at which point both earnings and dividends accelerated rapidly. Davidson wants to determine what impact any additional acquisitions will have on Samson’s future earnings potential and stock performance.
The other prospect is Wellborn Products, a manufacturer of a variety of over-the-counter pediatric products. Wellborn is a relatively new player in this segment of the market, but industry insiders have confidence in the proven track record of the company’s upper management who came from another firm that is a major participant in the industry. The market cap of Wellborn is much smaller than Samson’s, and the company differs from Samson because it has grown internally rather than through the acquisition of its competitors. Wellborn currently has no long-term debt outstanding. While the firm does not pay a dividend, it has recently declared that it intends to begin paying one at the end of the current calendar year.
Select financial information (year-end 2005) for Samson and Wellborn is outlined below:

Samson:

Current Price:
$36.00

Sales:
$75,000,000

Net Income:
$5,700,000

Assets:
$135,000,000

Liabilities:
$95,000,000

Equity:
$60,000,000

Wellborn:

Current Price:
$21.25

Dividends expected to be received at the end of 2006:
$1.25

Dividends expected to be received at the end of 2007:
$1.45

Price expected at year-end 2007:
$27.50

Required return on equity:
9.50%

Risk-free rate:
3.75%

Other financial information:

One-year forecasted dividend yield on market index:
1.75%

Consensus long-term earnings growth rate:
5.25%

Short-term government bill rate:
3.75%

Medium-term government note rate:
4.00%

Long-term government bond rate:
4.25%

It is the beginning of 2006, and Davidson wants use the above data to identify which will have the greatest expected returns. She must determine which valuation model(s) is most appropriate for these two securities. Also, Davidson must forecast sustainable growth rates for each of the companies to assess whether or not they would fit within the fund’s investment parameters.Using the Gordon growth model (GGM), what is the equity risk premium?
A)
5.50%.
B)
2.75%.
C)
3.25%.

The GGM calculates the risk premium using forward-looking or expectational data. The equity risk premium is estimated as the one-year forecasted dividend yield on market index, plus the consensus long-term earnings growth rate, minus the long-term government bond yield. Note that because equities are assumed to have a long duration, the long-term government bond yield serves as the proxy for the risk-free rate.
Equity risk premium = 1.75% + 5.25% − 4.25% = 2.75% (Study Session 10, LOS 35.b)

Davidson is familiar with the use of the capital asset pricing model (CAPM) and arbitrage pricing theory (APT) to estimate the required rate of return for an equity investment. However, there are some limitations associated with both models that should be considered in her analysis. Which of the following is least likely a limitation of the CAPM and/or APT?
A)
Model uncertainty, because it is unknown if the use of either model is theoretically correct and appropriate.
B)
Input uncertainty, because it is difficult to estimate the appropriate risk premiums accurately.
C)
Risk premium exposure, because it fails to consider the implications of an asset’s sensitivity to the various risk factors in the market.


Both CAPM and APT consider the sensitivity of an asset’s return to various risk factors. CAPM measures an asset’s sensitivity relative to the market portfolio with beta, while APT measures an asset’s sensitivity to a variety of risk factors, such as investor confidence, time horizon, inflation, business-cycle and market-timing. (Study Session 10, LOS 35.c)
Which of the following valuation models would be most appropriate in the valuation analysis of Wellborn Products?
A)
The free cash flow model, because the firm does not have a steady dividend payment history.
B)
The dividend discount model (DDM), because the hedge fund’s investment would represent a minority interest in the company.
C)
The residual income approach, because the firm is likely to have negative free cash flow for the foreseeable future.


Free cash flow models are appropriate for firms such as Wellborn that do not have a dividend payout history. (Study Session 11, LOS 39.a)
Davidson needs to determine if the shares of Wellborn are currently undervalued or overvalued in the market relative to the shares’ fundamental value. The estimated fair value of Wellborn shares, using a two-period dividend discount model (DDM), is:
A)
$21.25.
B)
$25.29.
C)
$27.58.


The value of Wellborn using a two-period DDM is$1.25 / 1.095) + (($1.45 + $27.50) / 1.0952) = $25.29 (Study Session 11, LOS 39.b)

As a part of her analysis, Davidson needs to calculate return on equity for both potential investments. What is last year’s return on equity (ROE) for Samson shares?
A)
17.10%.
B)
5.28%.
C)
9.50%.


ROE can be calculated using the DuPont formula, which is:ROE = Net Income / Stockholder’s Equity
ROE = (net income / sales) × (sales / total assets) × (total assets / stockholders’ equity)
Therefore: ROE = (5,700,000 / 75,000,000) × (75,000,000 / 135,000,000) × (135,000,000 / 60,000,000) = (0.076) × (0.556) × (2.25) = 0.095 = 9.50%.(Study Session 11, LOS 39.n)

Davidson determines that over the past three years, Samson has maintained an average net profit margin of 8 percent, a total asset turnover of 1.6, and a leverage ratio (equity multiplier) of 1.39. Assuming Samson continues to distribute 35 percent of its earnings as dividends, Samson’s estimated sustainable growth rate (SGR) is:
A)
17.8%.
B)
11.6%.
C)
6.2%.

Utilizing the PRAT model, where SGR is a function of profit margin (P), the retention rate (R), asset turnover (A) and financial leverage (T):
g = P × R × A × T
g = 0.08 × (1 − 0.35) × 1.6 × 1.39 = 0.116 = 11.6%.(Study Session 11, LOS 39.n)
作者: invic    时间: 2012-3-31 09:15

Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, the current value of Deployment Specialists is closest to:
A)
$33.28.
B)
$25.39.
C)
$30.60.


First estimate the amount of each of the next two dividends and the terminal value. The current value is the sum of the present value of these cash flows, discounted at 8.5%.
作者: invic    时间: 2012-3-31 09:15

An analyst has compiled the following financial data for ABC, Inc.
ABC, Inc. Valuation Scenarios
ItemScenario 1Scenario 2Scenario 3Scenario 4
Year 0 Dividends per Share$1.50$1.50$1.50$1.50
Long-term Treasury Bond Rate4.0%4.0%5.0%5.0%
Expected Return on the S&P 50012.0%12.0%12.0%12.0%
Beta1.41.41.41.4

g (growth rate in dividends)
0.0%
3.0%

Years 1-3, g=12.0%
After Year 3, g=3.0%

Year 1, g=20%
Year 2, g=18%
Year 3, g=16%
Year 4, g=9%
Year 5, g=8%
Year 6, g=7%
After Year 6, g=4%


What is the value of ABC, Inc.'s stock price using the assumptions contained in Scenario 4?
A)
$26.66.
B)
$22.22.
C)
$18.52.


The required rate of return is (r) = 0.05 + 1.4(0.12 − 0.05) = 0.148
The future dividends are predicted as the following:

Year

Dividend
01.50
11.50 × 1.2 = 1.80
21.80 × 1.18 =2.124
32.124 × 1.16 = 2.464
42.464 × 1.09 = 2.686
52.686 × 1.08 = 2.900
62.901 × 1.07 = 3.103
73.103 × 1.04 = 3.227


Now discount the dividend stream to get the value per share. Use the Gordon growth model to discount the constant growth after period 6. Value per share = (1.8 / 1.148) + (2.124 / 1.1482) + (2.464 / 1.1483) + (2.686 / 1.1484) + (2.900 / 1.1485) + (3.103 / 1.1486) + (3.227 / 1.1486(0.148 − 0.04)) = 22.22.
作者: invic    时间: 2012-3-31 09:16

If a stock expects to pay dividends of $2.30 per share next year, what is the value of the stock if the required rate of return is 12% and the expected growth rate in dividends is 4%?
A)
$28.75.
B)
$29.90.
C)
$19.17.


Using the Gordon growth model, the value per share = DPS1 / (r − g) = 2.30 / (0.12 − 0.04) = $28.75.
作者: invic    时间: 2012-3-31 09:16

An investor projects that a firm will pay a dividend of $1.00 next year and $1.20 the following year. At the end of the second year, the expected price of the shares is $22.00. If the required return is 14%, what is the current value of the firm’s shares?
A)
$15.65.
B)
$19.34.
C)
$18.73.

The current value of the shares is $18.73:
V0 = $1.00 / 1.14 + $1.20 / (1.14)2 + $22.00 / (1.14)2 = $18.73
作者: invic    时间: 2012-3-31 09:17

An investor projects that a firm will pay a dividend of $1.25 next year, $1.35 the second year, and $1.45 the third year. At the end of the third year, she expects the asset to be priced at $36.50. If the required return is 12%, what is the current value of the shares?
A)
$32.78.
B)
$29.21.
C)
$31.16.


The current value of the shares is $29.21: V0 = ($1.25 / 1.12) + ($1.35 / (1.12)2) + ($1.45 / (1.12)3) + ($36.50 / (1 + 0.12)3) = $29.21
作者: invic    时间: 2012-3-31 09:17

JAD just paid a dividend of $0.80. Analysts expect dividends to grow at 25% in the next two years, 15% in years three and four, and 8% for year five and after. The market required rate of return is 10%, and Treasury bills are yielding 4%. JAD has a beta of 1.4. The estimated current price of JAD is closest to:
A)
$45.91.
B)
$25.42.
C)
$29.34.


JAD’s stock price today can be calculated using the three-stage model. Start by finding the value of the dividends for the next four years with the two different dividend growth rates.

D1 = D0(1+g) = $0.80(1.25) = $1.00
D2 = D1(1+g) = $1.00(1.25) = $1.25
D3 = D2(1+g) = $1.25(1.15) = $1.4375
D4 = D3(1+g) = $1.4375(1.15) = $1.6531
(Alternatively, you could use your financial calculators to solve for the future value to find D1, D2, D3, and D4.)
Next find the value of the stock at the beginning of the constant growth period using the constant dividend discount model:


The easiest way to proceed is to use the NPV function in the financial calculator.
CF0 = 0; CF1 = 1.00; CF2 = 1.25; CF3 = 1.4375; CF4 = 1.6531 + 40.57 = 42.22
I = 12.4; NPV = 29.34
The value of the firm today is $29.34 per share.
作者: invic    时间: 2012-3-31 09:17

IAM, Inc. has a current stock price of $40.00 and expects to pay a dividend in one year of $1.80. The dividend is expected to grow at a constant rate of 6% annually. IAM has a beta of 0.95, the market is expected to return 11%, and the risk-free rate of interest is 4%. The expected stock price two years from today is closest to:
A)
$43.49.
B)
$41.03.
C)
$43.94.



作者: invic    时间: 2012-3-31 09:18

A firm's dividend per share in the most recent year is $4 and is expected to grow at 6% per year forever. If its shareholders require a return of 14%, the value of the firm's stock (per share) using the single-stage dividend discount model (DDM) is:
A)
$50.00.
B)
$53.00.
C)
$28.57.


The value of the firm's stock is: $4 × [1.06 / (0.14 − 0.06)] = $53.00
作者: invic    时间: 2012-3-31 09:28

Jand, Inc., currently pays a dividend of $1.22, which is expected to grow at 5%. If the current value of Jand’s shares based on the Gordon model is $32.03, what is the required rate of return?
A)
8%.
B)
9%.
C)
7%.


The required return is 9%: r = [$1.22(1 + 0.05) / $32.03] + 0.05 = 0.09 or 9%.
作者: invic    时间: 2012-3-31 09:29

A firm currently pays a dividend of $1.77, which is expected to grow at a rate of 4%. If the required return is 10%, what is the current value of the shares using the Gordon growth model?
A)
$29.76.
B)
$30.68.
C)
$29.50.


The current value of the shares is $30.68:
V0 = [$1.77(1 + 0.04)] / (0.10 – 0.04)] = $30.68
作者: invic    时间: 2012-3-31 09:29

Jax, Inc., pays a current dividend of $0.52 and is projected to grow at 12%. If the required rate of return is 11%, what is the current value based on the Gordon growth model?
A)
$58.24.
B)
unable to determine value using Gordon model.
C)
$39.47.


The Gordon growth model cannot be used if the growth rate exceeds the required rate of return.
作者: invic    时间: 2012-3-31 09:30

A company reports January 1, 2002, retained earnings of $8,000,000, December 31, 2002, retained earnings of $10,000,000, and 2002 net income of $5,000,000. The company has 1,000,000 shares outstanding and dividends are expected to grow at a rate of 5% per year. What is the expected dividend at the end of 2003?
A)
$3.15.
B)
$3.00.
C)
$13.65.

The first step is to determine 2002 dividends paid as ($8,000,000 + $5,000,000 − 10,000,000) = $3,000,000. The next step is to find the dividend per share ($3,000,000 / 1,000,000 shares) = $3.00 per share. Applying the 5% growth rate, next year’s expected dividend is $3.15, or $3.00 × 1.05.
作者: invic    时间: 2012-3-31 09:30

Suppose the equity required rate of return is 10%, the dividend just paid is $1.00 and dividends are expected to grow at an annual rate of 6% forever. What is the expected price at the end of year 2?
A)
$29.78.
B)
$28.09.
C)
$27.07.


The terminal value is $29.78, and that is the price an investor should be willing to pay at the end of year 2. The correct answer is shown below.

Year

Dividend

1

$1.0600

2

$1.1236

3

$1.1910



V3:

$1.191/(0.10 – 0.06) = $29.78

作者: invic    时间: 2012-3-31 09:31

Zephraim Axelrod, CFA, is trying to determine whether Allegheny Mining is a good investment. He decides to use the Gordon Growth model to calculate how much dividend growth shareholders can expect. To that end, he determines the following:
Based only on the information above, the implied dividend growth rate is closest to:
A)
10.27%.
B)
15.68%.
C)
19.89%.


We have the price and dividend. We need the required rate of return to use the Gordon Growth model to calculate implied dividend growth. Using the capital asset pricing model, the required return = risk-free rate + (beta × equity risk premium) = 17.72%.
Price = [dividend × (1 + dividend growth rate)] / [required return − growth rate]
18.12 = [0.32 × (1 + dividend growth rate)] / [0.1772 − dividend growth rate]
18.12 × [0.1772 − dividend growth rate] = 0.32 + 0.32 × dividend growth rate
3.2112 − 18.12 × dividend growth rate = 0.32 + 0.32 × dividend growth rate
2.8912 = 18.44 × dividend growth rate
1 = 6.3779 × dividend growth rate
Dividend growth rate = 15.68%
作者: invic    时间: 2012-3-31 09:31

In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned to increase its dividend at an annual rate of 13% for the foreseeable future. Analyst Clinton Spears has an annual return target of 15.5% for Smith Brothers stock. He decides to use the dividend-growth rate to back out another return estimate to test against his. Smith Brothers stock trades for $55 per share and earned $3.01 per share over the last 12 months. The company paid a dividend of $2.15 per share during the 12-month period, and its dividend-growth rate for the last five years was 9.2%.
Using the Gordon Growth model, the required annual return for Smith Brothers stock is closest to:
A)
13.47%.
B)
17.42%.
C)
19.18%.


The Gordon Growth model is as follows:
Price = [dividend × (1 + dividend growth rate)] / [required return − growth rate]
55 = [2.15 × 1.13] / [required return − 0.13]
55 = 2.4295 / [required return − 0.13]
22.6384 = 1 / [required return − 0.13]
[Required return − 0.13] = 0.04417
Required return = 0.17417 = 17.42%
作者: invic    时间: 2012-3-31 09:31

Analyst Louise Dorgan has put together a short fact sheet on two companies, Benson Orchards and Terra Firma Development.
<P [td=1,1,122]Benson OrchardsTerra Firma Development
Price/earnings ratio18.5<P [/td]
Most recent dividend$0.56 per share$1.67 per share
Estimated stock return15%<P [/td]
Estimated market return<P [td=1,1,183]13%
Beta1.21.7
Trailing profits$5.16 per share<P [/td]
Stock-market value$123 million$1.678 billion
Shares outstanding<P [td=1,1,183]875 million

The risk-free rate is 3.6%, and Dorgan estimates the stock market’s equity risk premium as 7.5%.
Using only the data presented above, can Dorgan create a Gordon Growth model for:
Benson OrchardsTerra Firm Development
A)
YesYes
B)
YesNo
C)
NoNo


To calculate a growth rate using the Gordon Growth model, we use four variables (one being the growth rate itself). If we have any three of the variables, we can solve for the fourth. The four variables are: stock price, dividend, required return, and dividend growth rate. The data presented are sufficient for the calculation of three of the variables for both companies.
Benson Orchards
We know the most recent dividend and the estimate stock return. From the P/E ratio and the trailing profits, we can determine the stock price. From those three pieces of data, we can calculate the dividend growth rate.
Terra Firma
We have the dividend. We can determine the stock price by dividing market value by shares outstanding. We can derive the estimated stock return using the capital asset pricing model. From those three statistics, we can create a Gordon Growth model and solve for the dividend-growth rate.
作者: invic    时间: 2012-3-31 09:32

Xerxes, Inc. forecasts earnings to be permanently fixed at $4.00 per share. Current market price is $35 and required return is 10%. Assuming the shares are properly priced, the present value of growth opportunities is closest to:
A)
-$5.00.
B)
+$3.50.
C)
+$5.00.


Share price = (no-growth earnings / required return) + PVGO
35 = (4 / 0.10) + PVGO
PVGO = -$5.00
作者: invic    时间: 2012-3-31 09:32

The required rate of return for an asset is often difficult to determine, but if we know the growth prospects and the current earnings of a firm we can determine the implied required rate of return from the:
A)
dividend rate.
B)
earnings retention rate.
C)
market price.


The required rate of return is implicit in the asset’s market price and can be determined with the present value of growth opportunities.
作者: invic    时间: 2012-3-31 09:32

Tri-coat Paints has a current market value of $41 per share with a earnings of $3.64. What is the present value of its growth opportunities (PVGO) if the required return is 9%?
A)
$3.92.
B)
$0.56.
C)
$1.27.


The PVGO is $0.56:
PVGO = $41 – ($3.64 / 0.09) = $0.56
作者: invic    时间: 2012-3-31 09:33

Obsidian Glass Company has current earnings of $2.22, a required return of 8%, and the present value of growth opportunities (PVGO) of $8.72. What is the current value of Obsidian’s shares?
A)
$57.17.
B)
$10.94.
C)
$36.47.


The current value is $36.47. V0 = ($2.22 / 0.08) + $8.72 = $36.47
作者: invic    时间: 2012-3-31 09:33

Ambiance Company has a current market price of $42, a current dividend of $1.25 and a required rate of return of 12%. All earnings are paid out as dividends. What is the present value of Ambiance’s growth opportunities (PVGO)?
A)
$38.85.
B)
$31.58.
C)
$16.71.


The PVGO is $31.58:
PVGO = $42 – ($1.25 / 0.12) = $31.58
作者: invic    时间: 2012-3-31 09:34


A firm has the following characteristics:
Based on this information and the Gordon growth model, what is the firm’s justified trailing price to earnings (P/E) ratio?
A)
11.9.
B)
8.9.
C)
11.3.


The justified trailing P/E is 11.9:
P0 / E0 = [($0.75)(1 + 0.11)/$3.50] / (0.13 – 0.11) = 11.8929
作者: invic    时间: 2012-3-31 09:34


A firm has the following characteristics:
Based on the dividend discount model, what is the firm’s assumed growth rate?
A)
12.4%.
B)
10.9%.
C)
8.6%.


The assumed growth rate is 10.9%:
P0 / E1 = ($0.75/$3.50) / (0.13 – g) = 10, g = 10.86%
作者: invic    时间: 2012-3-31 09:35


A firm has the following characteristics:
Based on this information and the Gordon growth model, what is the firm’s justified leading price to earnings (P/E) ratio?
A)
11.3.
B)
10.7.
C)
8.7.


The justified leading P/E is 10.7:
P0 / E1 = ($0.75 / $3.50) / (0.13 – 0.11) = 10.714
作者: invic    时间: 2012-3-31 09:35

Stan Bellton, CFA, is preparing a report on TWR, Inc. Bellton’s supervisor has requested that Bellton include a justified trailing price-to-earnings (P/E) ratio based on the following information:
Current earnings per share (EPS) = $3.50.
Dividend Payout Ratio = 0.60.
Required return for TRW = 0.15.
Expected constant growth rate for dividends = 0.05.
TWR’s justified trailing P/E ratio is closest to:
A)
4.0.
B)
6.3.
C)
6.0.



The dividend payout ratio (1 – b) is 0.60, so the retention ratio (b) is 0.4.
作者: invic    时间: 2012-3-31 09:35

If an asset’s beta is 0.8, the expected return on the equity market is 10.0%, and the appropriate discount rate for the Gordon model is 9.0%, what is the risk-free rate?
A)
5.00%.
B)
6.50%.
C)
2.50%.


Required return = risk-free rate + beta (expected equity market return – risk-free rate)
9% = risk-free rate + 0.8(0.10 – risk-free rate)
9% = 0.08 + 0.2(risk-free rate)
1% / 0.2 = risk-free rate = 0.05 or 5%
作者: invic    时间: 2012-3-31 09:36

What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 11.0% and a required return of 7.5%?
A)
$147.
B)
$152.
C)
$138.


The value of the preferred is $147:
V0 = ($100par × 11%) / 7.5% = $146.67
作者: invic    时间: 2012-3-31 09:36

If the value of an 8%, fixed-rate, perpetual preferred share is $134, and the par value is $100, what is the required rate of return?
A)
8%.
B)
7%.
C)
6%.


The required rate of return is 6%: V0 = ($100par × 8%) / r = $134, r = 5.97%
作者: invic    时间: 2012-3-31 09:36

A $100 par, perpetual preferred share pays a fixed dividend of 5.0%. If the required rate of return is 6.5%, what is the current value of the shares?
A)
$100.00.
B)
$76.92.
C)
$88.64.


The current value of the shares is $76.92:
V0 = ($100 × 0.05) / 0.065 = $76.92
作者: invic    时间: 2012-3-31 09:36

What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 7.0% and a required return of 9.0%?
A)
$71.
B)
$56.
C)
$78.


The value of the preferred is $78:
V0 = ($100par × 7%) / 9% = $77.78
作者: invic    时间: 2012-3-31 09:37

The Gordon growth model will NOT work when the:
A)
growth rate is greater than or equal to the required rate of return.
B)
required rate of return is greater than growth rate.
C)
growth rate is less than the required rate of return.


The Gordon growth model, P0 = DPS1/ (r - g), will not work if the growth rate is greater than or equal to the required rate of return.
作者: invic    时间: 2012-3-31 09:37

If the growth rate in dividends is too high, it should be replaced with:
A)
a growth rate closer to that of gross domestic product (GDP).
B)
the average growth rate of the industry.
C)
the growth rate in earnings per share.


A firm cannot, in the long term, grow at a rate significantly greater than the growth rate of the economy in which it operates. If the growth rate in dividends is too high, then it is best replaced by a growth rate closer to that of GDP.
作者: invic    时间: 2012-3-31 09:37

The Gordon growth model is well suited for:
A)
utilities.
B)
telecom companies.
C)
biotech firms.


Gordon growth model is best suited to firms that have a stable growth comparable to or lower than the nominal growth rate in the economy and have well established dividend payout policies. Utilities, with their regulated prices, stable growth and high dividends, are particularly well suited for this model.
作者: invic    时间: 2012-3-31 09:40

Which of the following would NOT be appropriate for the Gordon growth model?
A)
Mature, slow growth automotive manufacturer.
B)
High-tech start-up firm with no dividends.
C)
Regulated utility company.


The Gordon growth model is inappropriate for a firm with supernormal growth that cannot be expected to continue. A multistage model is appropriate for such a firm.
作者: invic    时间: 2012-3-31 09:40

Which of the following would NOT be appropriate to value a firm with two expected growth stages? A(an):
A)
Gordon growth model.
B)
free cash flow model.
C)
H-model.


The Gordon growth model would not be appropriate for a firm with two stages of growth but is useful to value a firm with steady slow growth.
作者: invic    时间: 2012-3-31 09:41

Applying the Gordon growth model to value a firm experiencing supernormal growth would result in:
A)
a zero value.
B)
understating the value of the firm.
C)
overstating the value of the firm.


Applying the Gordon growth model to such a firm would result in an estimate of value based on the assumption that the supernormal growth would continue indefinitely. This would overstate the value of the firm.
作者: invic    时间: 2012-3-31 09:41

Which of the following dividend discount models (DDMs) is most suited for firms growing at a rate less than the overall growth rate in the economy, with well-established dividend payout policies?
A)
Two-stage DDM.
B)
Gordon growth model.
C)
H-model.


The Gordon growth model assumes that dividends grow at a constant rate forever. It is most suited for firms growing at a rate less than the overall growth rate in the economy, with well-established dividend payout policies.
作者: invic    时间: 2012-3-31 09:41

Which of the following models would be most appropriate for a firm that is expected to grow at an initial rate of 10%, declining steadily to 6% over a period of five years, and to remain steady at 6% thereafter?
A)
The Gordon growth model.
B)
A two-stage model.
C)
The H-model.


The H-model is the best answer, as it avoids an immediate drop to 6% like a two-stage would. The Gordon growth model would not be appropriate
作者: invic    时间: 2012-3-31 09:42

What is the difference between a standard two-stage growth model and the H-model?
A)
The H-model assumes a terminal value, while the standard two-stage model does not.
B)
The H-model assumes that earnings will dip in the middle of each stage and return to the previous rate by the period's end.
C)
In the standard two-stage model, a fixed rate of growth is assumed for each stage, while the H-model assumes a linearly declining rate of growth in one stage.


The H-model provides an estimate of the firm’s value based on the assumption that the rate of growth will change linearly over the initial stage.
作者: invic    时间: 2012-3-31 09:42

Which of the following dividend discount models assumes a high growth rate during the initial stage, followed by a linear decline to a lower stable growth rate?
A)
Three-stage dividend discount model.
B)
Gordon growth model.
C)
H model.


The H model assumes a high growth rate during the initial stage, followed by a linear decline to a lower stable growth rate. It also assumes that the payout ratio is constant over time.
作者: rgonzalez    时间: 2012-3-31 09:45

The most appropriate model for analyzing a profitable high-tech firm is the:
A)
three-stage dividend discount model (DDM).
B)
zero growth cash flow model.
C)
H-model.


Most of high-tech firms grow at very high rates and are expected to grow at those rates for an initial period. These rates are expected to decline as the firm grows in size and loses its competitive advantage. Of the models provided, the three-stage DDM is most appropriate to analyze high-tech firms because of its flexibility. H-model may not be appropriate, because a linear decline from the high growth rate to the constant growth rate cannot be assumed and the dividend payout ratio is fixed.
作者: rgonzalez    时间: 2012-3-31 09:45

Which of the following models would be most appropriate for a firm that is expected to grow at 8% for the next three years, and at 6% thereafter?
A)
A two-stage model.
B)
The H-model.
C)
The Gordon growth model.


A firm that is expected to experience two growth stages with a fixed rate of growth for each stage should be evaluated with a two-stage dividend discount model.
作者: rgonzalez    时间: 2012-3-31 09:45

An analyst has collected the following data on two companies:

[td=1,1,127]
Middle Hickory Co.
Lower Elm Inc.

FCFE
Negative
Positive and growing

Capital investment
Significant
Decreasing


Which dividend-discount model is the best option for valuing the two companies?
Middle HickoryLower Elm
A)
Two-stageGordon Growth
B)
Gordon GrowthThree-stage
C)
Three-stageTwo-stage


Middle Hickory is in the initial-growth phase, while Lower Elm is in the transition phase. The three-stage model is appropriate for new, fast-growing companies. The two-stage model is appropriate for companies in the transitional phase.
作者: rgonzalez    时间: 2012-3-31 09:45

In which of the following stages is a firm most likely to distribute the highest proportion of its earnings in the form of dividends?
A)
Transition stage.
B)
Mature stage.
C)
Initial growth stage.


As a firm matures, the forces of competition begin to deny it opportunities to earn greater than the required return. Faced with this situation, most earnings are distributed to shareholders as dividends. An alternate way of returning capital is through stock repurchases.
作者: rgonzalez    时间: 2012-3-31 09:46

Most firms follow a pattern of growth that includes several stages. The second stage of growth is referred to as the:
A)
H-stage.
B)
transitional stage.
C)
mature stage.


The second stage is often referred to as the transitional stage. During this stage, the firm’s growth begins to slow as competitive forces build
作者: rgonzalez    时间: 2012-3-31 09:46

In what stage of growth would a firm most likely NOT pay dividends?
A)
Transition stage.
B)
Declining stage.
C)
Initial growth stage.


During the initial growth stage, the firm is able to exploit opportunities to earn greater than the required return. During this stage, earnings are reinvested in the growth opportunities rather than returned to the investors.
作者: rgonzalez    时间: 2012-3-31 09:46

Kyle Star Partners is expected to have earnings in year five of $6.00 per share, a dividend payout ratio of 50%, and a required rate of return of 11%. For year 6 and beyond the dividend growth rate is expected to fall to 3% in perpetuity. Estimate the terminal value at the end of year five using the Gordon growth model.
A)
$38.63.
B)
$37.50.
C)
$27.27.

The dividend for year 5 is expected to be $3 ($6 times 50%). The dividend for year 6 is then expected to be $3.00 × 1.03 = $3.09. The terminal value using the Gordon growth model is therefore: terminal value = 3.09 / (0.11 − 0.03) = $38.625
P5 = D6 / (k − g)
作者: rgonzalez    时间: 2012-3-31 09:47

Methods for estimating the terminal value in a DDM are least likely to include:
A)
the Gordon Growth Model.
B)
PVGO.
C)
the market multiple approach.


No matter which dividend discount model we use, we have to estimate a terminal value at some point in the future. There are two ways to do this: using the Gordon growth model and the market multiple approach (i.e., a P/E ratio).
作者: rgonzalez    时间: 2012-3-31 09:47

Q-Partners is expected to have earnings in ten years of $12 per share, a dividend payout ratio of 50%, and a required return of 11%. At that time, ROE is expected to fall to 8% in perpetuity and the trailing P/E ratio is forecasted to be eight times earnings. The terminal value at the end of ten years using the P/E multiple approach and DDM is closest to:
P/E multipleDDM
A)
96.3285.71
B)
96.3289.14
C)
96.0089.14


Terminal Value= P/E × EPS
= 8 × 12 = 96

D10 = 0.5 × 12 = 6
g = 0.50 × 0.08 = 4%
作者: rgonzalez    时间: 2012-3-31 09:48

Bernadine Nutting has just completed several rounds of job interviews with the valuation group, Ancis Associates. The final hurdle before the firm makes her an offer is an interview with Greg Ancis, CFA, the founder and senior partner of the group. He takes pride in interviewing all potential associates himself once they have made it through the earlier rounds of interviews, and puts candidates through a grueling series of tests. As soon as Nutting enters his office, Ancis tries to overwhelm her with financial information on a variety of firms, including AlphaBetaHydroxy, Inc., Turbo Financial Services, Aultman Construction, and Reality Productions. He begins with AlphaBetaHydroxy, Inc., which trades under the symbol AB and has an estimated beta of 1.4. The firm currently pays $1.50 per year in dividends, but the historical dividend growth rate has varied significantly, as shown in the table below.

AlphaBetaHydroxy, Inc.

Historical Dividend Growth

Year

Dividend Growth
Rate (%)

−1

+20

−2

+58

−3

−27

−4

−19

−5

+38

−6

+17

−7 and earlier

+3

Ancis says that, given AB’s wildly varying historical dividend growth, he wants to value the firm using 3 different scenarios. The Low-Growth scenario calls for 3% annual dividend growth in perpetuity. The Middle-Growth scenario calls for 12% dividend growth in years 1 through 3, and 3% annual growth thereafter. The High-Growth scenario specifies dividend growth year by year, as follows:

                 AlphaBetaHydroxy, Inc.

                High-Growth Scenario

Year

Dividend Growth
Rate (%)

1

20

2

18

3

16

4

9

5

8

6

7

7 and thereafter

4

Nutting suggests that the scenarios are incomplete, saying that she’d like to include some additional assumptions for the various scenarios. For example, while she would estimate the return on the S& 500 to be 12% regardless of AB’s performance, she would want to vary the outlook for interest rates depending on the scenario. In specific, she’d use a long-term Treasury bond rate of 4% for the two lower-growth scenarios, but raise it to 5% for the two higher-growth scenarios.
Ancis then moves on to Turbo Financial Services. Ancis has been following Turbo for quite some time because of its impressive earnings growth. Earnings per share have grown at a compound annual rate of 19% over the past six years, pushing earnings to $10 per share in the year just ended. He considers this growth rate very high for a firm with a cost of equity of 14%, and a weighted average cost of capital (WACC) of only 9%. He’s especially impressed that the firm can achieve these growth rates while still maintaining a constant dividend payout ratio of 40%, which he expects the firm to continue indefinitely. With a market value of $55.18 per share, Ancis considers Turbo a strong buy.Ancis believes that Turbo will have one more year of strong earnings growth, with EPS rising by 20% in the coming year. He then expects EPS growth to fall 5 percentage points per year for each of the following two years, and achieve its long-term sustainable growth rate of 5% beginning in year four.
Finally, Ancis turns to Aultman Construction, trading at $22 per share (with current EPS of $2.50 and a required return of 18%), and Reality Productions, which currently trades at $30 per share. Reality Production’s current divided is the same as AB’s ($1.50), but the historical dividend growth rate has been a stable 10%. Dividend growth is expected to decline linearly over six years to 5%, and then remain at 5% indefinitely.Ancis begins the valuation test by asking Nutting to value AB with both the two-stage DDM model and the Gordon Growth model, using the scenario most suited to each modeling technique. Nutting answers that the Gordon Growth model gives a valuation for AB that is $1.32 higher than the valuation using the DDM model. After reviewing her analysis, Ancis says that her valuation is incorrect because she should have applied the Gordon Growth model to the High-Growth scenario.
Unhappy with her misuse of the Gordon Growth Model, Ancis asks Nutting to explain the appropriate uses of two other valuation tools: the H-model and three-stage DDM. She says that the H-model is most suited to sustained high-growth companies while three-stage DDM is only appropriate to companies where the dividend growth rate is expected to decline in stages. Ancis says that three-stage DDM does not require a company’s growth rate to decline – it could equally well apply when a company’s growth is expected to be higher in the final stage than in the first. Nutting loses the job.Which of the following statements is least accurate? The two-stage DDM is most suited for analyzing firms that:
A)
are expected to grow at a normalized rate after a fixed period of time.
B)
are in an industry with low barriers to entry.
C)
own patents for a very profitable product.


The two-stage DDM is well suited to firms that have high growth and are expected to maintain it for a specific period. The assumption that the growth rate drops sharply from high-growth in the initial phase to a stable rate makes this model appropriate for firms that have a competitive advantage, such as a patent, that is expected to exist for a fixed period of time. The model is not useful in analyzing a firm that is in an industry with low barriers to entry. Low barriers to entry are likely to result in increased competition. Therefore, the length of the initial phase of the growth period is indeterminate and probably uneven. (Study Session 11, LOS 39.i)
Regarding the statements made by Ancis and Nutting about the correct valuation models and values for AB:
A)
only Nutting is correct.
B)
only Ancis is correct.
C)
both are incorrect.


Both Ancis’s and Nutting’s statements are incorrect.
The Gordon Growth Model assumes that dividends increase at a constant rate perpetually. That fits the Low-Growth scenario, not the Middle or High-Growth scenarios. Thus, Ancis’s statement is incorrect.In the Low-Growth scenario:
The required rate of return is (r) = 0.04 + 1.4(0.12 − 0.04) = 0.152.
The value per share is DPS0(1 + gn) / (r − gn) = [(1.50)(1.03)] / (0.152 − 0.03) = $12.66.

The two-stage DDM model is most suited to a company that has one dividend growth rate for a specified time period and then shifts suddenly to a second dividend growth rate. That best fits the Middle-Growth scenario. In the Middle-Growth scenario,The required rate of return is (r) = 0.05 + (1.4)(0.12 − 0.05) = 0.148.
The value per share is:
The two-stage DDM gives a value for AB that is ($16.44 − $12.66) = $3.78 higher than the value given by the Gordon Growth Model. Thus Nutting’s statement is also incorrect. (Study Session 11, LOS 39.l, m)


What is the implied required rate of return for Reality Productions?
A)
12.50%.
B)
11.00%.
C)
11.75%.


The H-model applies to firms where the dividend growth rate is expected to decline linearly over the high-growth stage until it reaches its long-run average growth rate. This most closely matches the anticipated pattern of growth for Reality Productions.The H-model can be rewritten in terms of r and used to solve for r given the other model inputs:
r = D0 / P0 × [(1 + gL) × [H × (gS − gL)] + gL
Here, r = 1.5 / 30 × [(1 + 0.05) + [(6.0 / 2) × (0.10 − 0.05)] + 0.05 = 0.11 (Study Session 11, LOS 39.m)

Regarding the statements made by Ancis and Nutting about the appropriate uses of the H-model and three-stage DDM:
A)
both are correct.
B)
both are incorrect.
C)
only one is correct.


Ancis’s statement is technically correct. Although three-stage DDM traditionally uses progressively lower growth rates in each stage, that is not necessary. Three-stage DDM applies when growth rates vary in any manner, as long as they do so in three distinct stages. Nutting’s statement is incorrect because the H-model is not appropriate for a company with sustained dividend growth at any level (high or not). The H-model assumes that the company’s dividend growth rate declines linearly. (Study Session 11, LOS 39.i)
Based upon its current market value, what is the implied long-term sustainable growth rate of Turbo Financial Advisors?
A)
0.3%.
B)
4.0%.
C)
19.0%.


The implied long-term rate is the rate that will cause the present value of expected dividends to equal its current market value. Since Ancis provides specific growth rates for Turbo over the next three years, we can use a multi-stage dividend discount model and solve for the long-term growth rate that makes the present value equal to the current market value.First, we calculate Turbo’s expected dividends.
D0 = $10.00 current EPS times the dividend payout ratio of 40%D0 = $4.00 dividend per share in year 0.
Note that the 19% historical dividend growth rate is irrelevant to the current value of the firm. Since the dividend payout ratio is expected to remain constant at 40%, we can use the expected growth rate in earnings to estimate future dividends. EPS growth is forecast at 20% in year 1, 15% in year 2, and 10% in year 3.Multiplying each year’s expected dividend times the relevant forecast growth rate, we calculate:
D1 = ($4.00 dividend in year 0) × (1.20) = $4.80D2 = ($4.80 dividend in year 1) × (1.15) = $5.52
D3 = ($5.52 dividend in year 2) × (1.10) = $6.07 Discounting these back to their present value in year 0 using the cost of equity (the WACC is irrelevant), we find:
Present Value (D1 + D2 + D3) = ($4.80 / 1.141) + ($5.52 / 1.142) + ($6.07 / 1.143)= $4.21 + $4.25 + $4.10
= $12.56Thus, we know that $12.56 of the current $55.18 market value represents the present value of the expected dividends in years 1, 2 and 3. Therefore, the present value of the firm’s dividends for years 4 and beyond must equal ($55.18 - $12.56) = $42.62.
Since the present value of the firm’s dividends beginning in year 4 equals $42.62, the future value in year four will equal ($42.62 × 1.143) = $63.14.Now that we know the value in year 4 of the future stream of steady-growth dividends, we can solve for the growth rate using the Gordon Growth Model:
P3 = [($6.07)(1 + x)] / (0.14 – x ) = $63.1463.14 (0.14 – x) = 6.07 (1+x)
8.84 – 63.14x = 6.07 + 6.07x2.77 = 69.21x
x = 0.04The long-term growth rate that makes Turbo fairly valued is 4% per year.
We can check our calculation by plugging the 4% growth rate we just solved for into the Gordon Growth Model and then plugging that result into the basic multi-stage dividend discount model3 = [($6.07)(1 + 0.04)] / (0.14 − 0.04)
P3 = 6.313 / (.10)P3 = 63.13
(Note that this value varies from the previous calculation by 0.01 because of rounding error.)P0 = ($4.80 / 1.141) + ($5.52 / 1.142) + ($6.07 / 1.143) + ($63.13 / 1.143) = $55.18, which is the current market value. At a 4% growth rate, Turbo is fairly valued.
Note that on the exam, it may be faster to plug each growth rate into the Gordon Growth Model and then plug each of those terminal values into the basic multi-stage formula than to solve for the growth rate. This trial and error method is especially effective if you start with the “middle” growth rate and then decide which value to test next depending on the results of the first calculation. For example, if the first growth rate gives a value for the firm that is too high, you can eliminate all the higher growth rates and try the next lower one. (Study Session 11, LOS 39.n)

What is the present value of Aultman’s future investment opportunities as a percentage of the market price?
A)
36.9%.
B)
13.9%.
C)
8.1%.


The present value of the company’s future investment opportunities is also known as PVGO, which can be calculated using the formula: Value = (E / r) + PVGO

where:
E = earnings per share

r = required return

(E / r) is the value of the assets in place


Here, $22 = ($2.5 / 0.18) + PVGO
PVGO = $8.11
The PVGO as a percentage of the market price equals ($8.11 / $22.00) = 36.9%. (Study Session 11, LOS 39.e)
作者: rgonzalez    时间: 2012-3-31 09:49

UC Inc. is a high-tech company that currently pays a dividend of $2.00 per share. UC’s expected growth rate is 5%. The risk-free rate is 3% and market return is 9%.What is the beta implied by a market price of $40.38?
A)
1.20.
B)
1.16.
C)
1.02.


40.38 = 2.10 / (r − 0.05)
r = 2.10 / 40.38 + 0.05 = 0.1020
From CAPM:
r = 0.03 + b(0.09 − 0.03)
0.1020 = 0.03 + 0.06b
b = 1.20

What is the price of the UC stock if beta is 1.12?
A)
$44.49.
B)
$9.72.
C)
$42.37.


From CAPM:
r = 0.03 + b(0.09 − 0.03)
r = 0.03 + 1.12(0.06)
r = 0.0972
V0= D1 / (r − g)
      = 2.00(1 + 0.05) / (0.0972 − 0.05)
      = 2.10 / 0.0472 = $44.49

Assuming a beta of 1.12, if UC is expected to have a growth rate of 10% for the first 3 years and 5% thereafter, what is the price of UC stock?
A)
$53.81.
B)
$46.89.
C)
$50.87.


D1 = 2(1.10) = 2.20
D2 = 2.20(1.10) = 2.42
D3 = 2.42(1.10) = 2.662
D4 = 2.662(1.05) = 2.795
V3 = D4 / (r − g)
      = (2.795) / (0.0972 − 0.05)
      = 59.22  
V0 = [2.20 / 1.0972] + [2.42 / (1.0972)2] + [(2.662 + 59.22) / (1.0972)3]
      = $50.87

Assuming a beta of 1.12, if UC’s growth rate is 10% initially and is expected to decline steadily to a stable rate of 5% over the next three years, what is the price of UC stock?
A)
$47.67.
B)
$46.61.
C)
$47.82.


Given: D0 = 2.00; gL = 0.05; gS = 0.10; H = (3 / 2) = 1.50; and r = 0.0972
V0 = {[D0(1 + gL)] + [D0 × H × (gS − gL)]} / (r − gL)
V0 = [2(1.05) + 2(1.50)(0.10 − 0.05)] / (0.0972 − 0.05)
     = 2.25 / 0.0472 = $47.67
作者: rgonzalez    时间: 2012-3-31 09:49

An analyst for a small European investment bank is interested in valuing stocks by calculating the present value of its future dividends. He has compiled the following financial data for Ski, Inc.:

Earnings per Share (EPS)

Year 0

$4.00

Year 1

$6.00

Year 2

$9.00

Year 3

$13.50


Note: Shareholders of Ski, Inc., require a 20% return on their investment in the high growth stage compared to 12% in the stable growth stage. The dividend payout ratio of Ski, Inc., is expected to be 40% for the next three years. After year 3, the dividend payout ratio is expected to increase to 80% and the expected earnings growth will be 2%. Using the information contained in the table, what is the value of Ski, Inc.'s, stock?
A)
$43.04.
B)
$39.50.
C)
$71.38.


The dividends in the next four years are:
Year 1: 6 × 0.4 = 2.4
Year 2: 9 × 0.4 = 3.6
Year 3: 13.5 × 0.4 = 5.4
Year 4: (13.5 × 1.02) × 0.8 = 11.016

The terminal value of the firm (in year 3) is 11.016 / (0.12 − 0.02) = 110.16. Value per share = 2.4 / (1.2)1 + 3.6 / (1.2)2+ 5.4 / (1.2)3 + 110.16 / (1.2)3 = $71.38.
作者: rgonzalez    时间: 2012-3-31 09:50

An analyst has compiled the following financial data for ABC, Inc.:

ABC, Inc. Valuation Scenarios
ItemScenario 1Scenario 2Scenario 3Scenario 4
Year 0 Dividends per Share$1.50$1.50$1.50$1.50
Long-term Treasury Bond Rate4.0%4.0%5.0%5.0%
Expected Return on the S&P 50012.0%12.0%12.0%12.0%
Beta1.41.41.41.4

g (growth rate in dividends)

0.0%

3.0%

Years 1-3, g=12.0%

After Year 3, g=3.0%

Year 1, g=20%

Year 2, g=18%

Year 3, g=16%

Year 4, g=9%

Year 5, g=8%

Year 6, g=7%

After Year 6, g=4%


If year 0 dividend is $1.50 per share, the required rate of return of shareholders is 15.2%, what is the value of ABC, Inc.'s stock price using the H-Model? Assume that the growth in dividends has been 20% for the last 8 years, but is expected to decline 3% per year for the next 5 years to a stable growth rate of 5%.
A)
$19.85.
B)
$24.26.
C)
$20.95.

Use the H-Model to value the firm. The H-Model assumes that the initial growth rate (ga) will decline linearly to the stable growth rate (gn). The high growth period is assumed to last 2H years. Hence, the value per share = DPSo(1 + gn) / (r − gn) + DPSo × H × (ga − gn) / (r − gn)
(1.5 × 1.05) / (0.152 − 0.05) + [1.5 × (5 / 2) × (0.20 − 0.05)] / (0.152 − 0.05)

1.575 / 0.102 + 0.5625 / 0.102
15.44 + 5.51 = $20.95
作者: rgonzalez    时间: 2012-3-31 09:50

An analyst has forecast that Apex Company, which currently pays a dividend of $6.00, will continue to grow at 8% for the next two years and then at a rate of 5% thereafter. If the required return is 10%, based on a two-stage model what is the current value of Apex shares?
A)
$126.24.
B)
$127.78.
C)
$133.13.


The current value of Apex shares is $133.13:
V0 = [($6 × 1.08) / 1.10] + [($6 × (1.08)2) / 1.102] + [ ($6 × (1.08)2 × 1.05) / (1.102 × (0.10 – 0.05))] = $133.13
作者: rgonzalez    时间: 2012-3-31 09:50

A company’s stock beta is 0.76, the market return is 10%, and the risk-free rate is 4%. The stock will pay no dividends for the first two years, followed by a $1 dividend and $2 dividend, respectively. An investor expects to sell the stock for $10 at the end of four years. What price is an investor willing to pay for this stock?
A)
$9.42.
B)
$11.03.
C)
$10.16.


The first step is to determine the required rate of return as 4% + [(10% – 4%) × 0.76] or 8.56% per year. The second step is to determine the present value of all future expected cash flows, including the terminal $10 stock price, discounted back four years to today. The solution is shown below.

Year

CF

1

0

2

0

3

1

4

2

4

10

0/1.0856 + 0/(1.0856)2 + 1/(1.0856)3 + (2 + 10)/(1.0856)4 = $9.42

作者: rgonzalez    时间: 2012-3-31 09:51

An analyst has forecast that Hapex Company, which currently pays a dividend of $6.00, will grow at a rate of 8%, declining to 5% over the next two years, and remain at that rate thereafter. If the required return is 10%, based on an H-model what is the current value of Hapex shares?
A)
$126.24.
B)
$129.60.
C)
$131.17.


The current value of Hapex shares is $129.60:
V0 = [$6(1 + 0.05) + $6(2/2)(0.08 – 0.05)] / (0.10 – 0.05) = $129.60
作者: rgonzalez    时间: 2012-3-31 09:51

An analyst has forecasted dividend growth for Triple Crown, Inc., to be 8% for the next two years, declining to 5% over the following three years, and then remaining at 5% thereafter. If the current dividend is $4.00, and the required return is 10%, what is the current value of Triple Crown shares based on a three-stage model?
A)
$73.68.
B)
$91.11.
C)
$92.23.


V0 = $4(1.08) / 1.10 + $4(1.08)2 / (1.10)2 + [$4(1 + 0.08)2(3/2)(0.08 – 0.05) + $4(1.08)2(1.05)] / [(1.10)2(0.10 – 0.05)] = $92.23
作者: rgonzalez    时间: 2012-3-31 09:51

James Malone, CFA, covers GNTX stock, which is currently trading at $45.00 and just paid a dividend of $1.40. Malone expects the dividend growth rate to decline linearly over the next six years from 25% in the short run to 6% in the long run. Malone estimates the required return on GNTX to be 13%. Using the H-model, the value of GNTX is closest to:
A)
$33.40.
B)
$17.55.
C)
$32.60.


The estimated value of GNTX using the H-model is calculated as follows:
作者: rgonzalez    时间: 2012-3-31 09:51

If we increase the required rate of return used in a dividend discount model, the estimate of value produced by the model will:
A)
decrease.
B)
increase.
C)
remain the same.


The required rate of return is used in the denominator of the equation. Increasing this factor will decrease the resulting value.
作者: rgonzalez    时间: 2012-3-31 09:52

Which of the following groups of statistics provides enough data to calculate an implied return for a stock using the two-stage DDM?
A)
Short-term growth rate, long-term growth rate, stock price, trailing 12-month profits.
B)
Yield, stock price, historical dividend-growth rate, historical profit-growth rate.
C)
P/E ratio, trailing 12-month profits, short-term PEG ratio, long-term PEG ratio, yield.


To calculate an implied return using the two-stage DDM, we need the stock price, the dividend, a short-term growth rate, and a long-term growth rate. In the correct answer, we can derive the stock price from the P/E ratio and profits, then derive the dividend from the price and the yield. Given the P/E ratio, we can also distill growth rates using the PEG ratios. Admittedly, earnings-growth rates aren’t the same as dividend-growth rates, but analysts routinely use either in their models. More to the point, this is the only answer in which we can come up with even imperfect data for all the needed variables. One choice does not provide us with a way to find the dividend. The other option does not give us the needed short-term and long-term growth rates.
作者: rgonzalez    时间: 2012-3-31 09:52

Analyst Kelvin Strong is arguing with fellow analyst Martha Hatchett. Strong insists that the dividend discount model can be used to calculate the required return for a stock, though only if the growth rate remains constant. Hatchett maintains that while such models are useful for calculating the value of a stock, they should not be used to calculate required returns. Who is CORRECT?
StrongHatchett
A)
CorrectIncorrect
B)
IncorrectIncorrect
C)
IncorrectCorrect


Dividend discount models can be used to calculate required returns, assuming you have the stock price, dividends, and dividend-growth rates, so Hatchett is wrong. Strong is right about the fact that a DDM can calculate required returns, but wrong about the growth rate assumption. Multistage dividend discount models can account for expected changes in the growth rate.
作者: rgonzalez    时间: 2012-3-31 09:52

In using the capital asset pricing model (CAPM) to determine the appropriate discount rate for discounted cash flow models (DCFs), the asset’s beta is used to determine the amount of:
A)
the expected return in addition to the return required by the risk of the position.
B)
risk-free rate applicable to the time period of the investment.
C)
equity premium.


Beta measures the correlation between the equity market or index for which the market risk premium is calculated and the particular asset being valued. Beta is used to approximate the proportion of the equity risk premium applicable to the asset (in relation to the market or index used).
作者: rgonzalez    时间: 2012-3-31 09:53

If the risk-free rate is 6%, the equity premium of the chosen index is 4%, and the asset’s beta is 0.8, what is the discount rate to be used in applying the dividend discount model?
A)
9.20%.
B)
7.80%.
C)
10.80%.


The discount rate = risk-free rate + beta (return expected on equity market less the risk-free rate). Here, discount rate = 0.06 + (0.8 × 0.04) = 0.092, or 9.2%.
作者: rgonzalez    时间: 2012-3-31 09:53

Which of the following is least likely a valid approach to determining the appropriate discount rate for a firm’s dividends?
A)
Capital asset pricing model (CAPM).
B)
Arbitrage pricing theory (APT).
C)
Free cash flow to firm (FCFF).


FCFF is another discounted cash flow model, not a method to determine required returns. Each of the other answers is a valid approach to determining an appropriate discount rate.
作者: rgonzalez    时间: 2012-3-31 09:53

If we know the forecast growth rates for a firm’s dividends and the current dividends and current value, we can determine the:
A)
net margin of the firm.
B)
required rate of return.
C)
sustainable growth rate.


Just as we can determine the current value of the shares from the current dividends, growth forecasts and required return, we can solve for any one of them if we know the other three factors
作者: rgonzalez    时间: 2012-3-31 09:54

An investor buys shares of a firm at $10.00. A year later she receives a dividend of $0.96 and sells the shares at $9.00. What is her holding period return on this investment?
A)
-0.8%.
B)
-0.4%.
C)
+1.2%.


The holding period return = ($0.96 + $9.00 / $10.00) – 1 = –0.004 or –0.4%
作者: rgonzalez    时间: 2012-3-31 09:54

Given that a firm’s current dividend is $2.00, the forecasted growth is 7%, declining over three years to a stable 5% thereafter, and the current value of the firm’s shares is $45, what is the required rate of return?
A)
7.8%.
B)
9.8%.
C)
10.5%.


The required rate of return is 9.8%.
r = ($2/$45) [(1 + 0.05) + (3/2)(0.07 – 0.05)] + 0.05 = 0.0980Since the H-model is an approximation model, it is possible to solve for r directly without iteration
作者: rgonzalez    时间: 2012-3-31 09:55

Given that a firm’s current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm’s shares is $54.50, what is the required rate of return?
A)
9%.
B)
Can’t be determined.
C)
10%.


The equation to determine the required rate of return is solved through iteration.
$54.50 = $2(1.07) / (1 + r) + $2(1.07)2 / (1 + r)2 + {[$2(1.07)2(1.05)] / (r - 0.05)} / [(1 + r)2
Through iteration, r = 9%
作者: rgonzalez    时间: 2012-3-31 09:55

CAB Inc. just paid a current dividend of $3.00, the forecasted growth is 9%, declining over four years to a stable 6% thereafter, and the current value of the firm’s shares is $50, what is the required rate of return?
A)
9.8%.
B)
10.5%.
C)
12.7%.


The required rate of return is 12.7%.
r = ($3 / $50)[(1 + 0.06) + (4 / 2)(0.09 − 0.06)] + 0.06 = 12.7%
Since the H-model is an approximation model, it is possible to solve for r directly without iteration
作者: rgonzalez    时间: 2012-3-31 09:55

Recent surveys of analysts report long-term earnings growth estimates as 5.5% and a forecasted dividend yield of 2.0% on the market index. At the time of the survey, the 20-year U.S. government bond yielded 4.8%. According to the Gordon growth model, what is the equity risk premium?
A)
7.5%.
B)
0.4%.
C)
2.7%.


Equity risk premium = 2.0% + 5.5% – 4.8% = 2.7%
作者: RobertA    时间: 2012-3-31 11:40

An investor computes the current value of a firm’s shares to be $34.34, based on an expected dividend of $2.80 in one year and an expected price of the share in one year to be $36.00. What is the investor’s required rate of return on this investment?
A)
10%.
B)
11%.
C)
13%.


The required return = [($36.00 + $2.80) / $34.34 ] – 1 = 0.13 or 13%.
作者: RobertA    时间: 2012-3-31 11:42

An investor projects the price of a stock to be $16.00 in one year and expected the stock to pay a dividend at that time of $2.00. If the required rate of return on the shares is 11%, what is the current value of the shares?
A)
$16.22.
B)
$14.11.
C)
$15.28.


The value of the shares = ($16.00 + $2.00) / (1 + 0.11) = $16.22
作者: RobertA    时间: 2012-3-31 11:42

Given an equity risk premium of 3.5%, a forecasted dividend yield of 2.5% on the market index and a U.S. government bond yield of 4.5%, what is the consensus long-term earnings growth estimate?
A)
8.0%.
B)
10.5%.
C)
5.5%.


Equity risk premium = forecasted dividend yield + consensus long term earnings growth rate – long-term government bond yield.Therefore,
Consensus long term earnings growth rate =
Equity risk premium - forecasted dividend yield + long-term government bond yield
Consensus long term earnings growth rate = 3.5% - 2.5% + 4.5% = 5.5%
作者: RobertA    时间: 2012-3-31 11:42

A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm’s shares is $35.00, what is the required return applicable to the investment based on the Gordon dividend discount model (DDM)?
A)
8.00%.
B)
8.25%.
C)
7.86%.


The Gordon DDM uses the dividend for the period (t + 1) which would be $1.05.
$35 = $1.05 / (required return – 0.05)
Required return = 0.08 or 8.00%
作者: RobertA    时间: 2012-3-31 11:43

If the expected return on the equity market is 10%, the risk-free rate is 3%, and an asset’s beta is 0.6, what is the appropriate equity risk premium for the asset in applying the Gordon growth model?
A)
6.40%.
B)
4.20%.
C)
9.00%.


The asset’s equity risk premium is equal to it’s beta times the difference between the expected return on the equity market and the risk-free rate. Equity Risk Premium = 0.6(0.10 − 0.03) = 0.042 or 4.2%.
作者: RobertA    时间: 2012-3-31 11:43

GreenGrow, Inc., has current dividends of $2.00, current earnings of $4.00 and a return on equity of 16%. What is GreenGrow’s sustainable growth rate?
A)
9%.
B)
6%.
C)
8%.


GreenGrow’s sustainable growth rate is 8%.
g = [1 – ($2/$4)](0.16) = 8%
作者: RobertA    时间: 2012-3-31 11:43

Sustainable growth is the rate that earnings can grow:
A)
without additional purchase of equipment.
B)
indefinitely without altering the firm's capital structure.
C)
with the current assets.


Sustainable growth is the rate of earnings growth that can be maintained indefinitely without the addition of new equity capital.
作者: RobertA    时间: 2012-3-31 11:44

The sustainable growth rate, g, equals:
A)
pretax margin divided by working capital.
B)
dividend payout rate times the return on assets.
C)
earnings retention rate times the return on equity.


The formula for sustainable growth is: g = b × ROE, where g = sustainable growth, b = the earnings retention rate, and ROE equals return on equity.
作者: RobertA    时间: 2012-3-31 11:45

In computing the sustainable growth rate of a firm, the earnings retention rate is equal to:
A)
Dividends / required rate of return.
B)
1 − (dividends / assets).
C)
1 − (dividends / earnings).


Earnings retention rate = 1 − (dividends / earnings).
作者: RobertA    时间: 2012-3-31 11:45

Dynamite, Inc., has current earnings of $26, current dividend of $2, and a returned on equity of 18%. What is its sustainable growth?
A)
16.62%.
B)
14.99%.
C)
13.37%.


g = [1 − ($2 / $26)]0.18 = 16.62%
作者: RobertA    时间: 2012-3-31 11:45

Supergro has current dividends of $1, current earnings of $3, and a return on equity of 16%, what is its sustainable growth rate?
A)
12.2%.
B)
8.9%.
C)
10.7%.


g = (1 – 1/3)(0.16) = 0.107
作者: RobertA    时间: 2012-3-31 11:46

Heather Callaway, CFA, is concerned about the accuracy of her valuation of Crimson Gate, a fast-growing telecommunications-equipment company that her firm rates as a top buy. Crimson currently trades at $134 per share, and Callaway has put together the following information about the stock:
Most recent dividend per share$0.55
Growth rate, next 2 years30%
Growth rate, after 2 years12%
Trailing P/E25.6
Financial leverage3.4
Sales$11.98 per share
Asset turnover11.2
Estimated market rate of return13.2%

Callaway’s employer, Bates Investments, likes to use a company’s sustainable growth rate as a key input to obtaining the required rate of return for the company’s stock.
Crimson’s sustainable growth rate is closest to:
A)
14.8%.
B)
13.2%.
C)
16.6%.


Sustainable growth rate = ROE × retention rate
Earnings per share = price / (P/E) = $134 / 25.6 = $5.23
The retention rate represents the portion of earnings not paid out in dividends. = (5.23 − 0.55) / 5.23 = 0.89 or 89%
ROE = profit margin × asset turnover × financial leverage
ROE = 5.23 / 11.98 × 11.2 × 3.4 = 16.6%
Sustainable growth rate = 89% × 16.6% = 14.8%



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