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标题: Equity Valuation【Reading 41】Sample [打印本页]
作者: anshultongia    时间: 2012-3-31 14:41     标题: [2012 L2] Equity Valuation【Session 12- Reading 41】Sample

Shares of TKR Construction (TKR) are selling for $50. Earnings for the last 12 months were $4.00 per share. The average trailing P/E ratio for firms in TKR’s industry is 15. The appropriate WACC is 12%, and the risk-free rate is 8%. Assume a growth rate of 0%. Using the method of comparables, what price is indicated for TKR?
A)
$33.33.
B)
$50.00.
C)
$60.00.


Using the method of comparables, TKR should be priced as (15 × 4) = $60.00.
作者: anshultongia    时间: 2012-3-31 14:42

An analyst begins an equity analysis of Company A by noting the following ratios from three companies in the same industry:
EPSPE
Company A$1.6010.0
Company B$2.1012.5
Company C$5.8013.0

This analyst is most likely using:
A)
the method of forecasted fundamentals.
B)
the method of comparables.
C)
technical analysis.


The analysis is comparing ratios of three companies in the same industry. The Law of One Price states that similar assets should have comparable prices.
作者: anshultongia    时间: 2012-3-31 14:43

Lucas Davenport, CFA, has been assigned the task of doing a valuation analysis of Sanford Systems Inc. Sanford is currently trading at $15 per share. Exhibits 1 and 2 present a summary of Sanford’s financial statements for 2007 and 2008.
Davenport has previously completed a FCFE valuation, which yielded a value of $11.18 per share based on FCFE per common share in 2008 of $0.85.
Exhibit 1: Sanford Systems Balance Sheets as of 12/31/2008 (in US$ millions)
<P > td [td=1,1,81]20072008
Cash and equivalents$325450
Accounts receivable850870
Inventory1,0001,050
Total current assets$2,175$2,370
Gross fixed assets13,60015,900
Accumulated depreciation2,3002,900
Net fixed assets11,30013,000
Total assets$13,475$15,370
Accounts payable$1,500$1,520
Notes payable300550
Accrued taxes and expenses----------------
Total current liabilities$1,800$2,070
Long-term debt$5,575$6,111
Common stock100100
Additional paid-in capital----------------
Retained earnings6,0007,089
Total shareholders' equity$6,100$7,189
Total liabilities and shareholders' equity$13,475$15,370

Exhibit 2: Sanford Systems Income Statements for 2007 and 2008 (in US$ millions)
<P > td [td=1,1,84]20072008
Total revenues$12,000$13,100
Operating costs and expenses9,4009,600
EBITDA$2,600$3,500
Depreciation and amortization500600
EBIT$2,100$2,900
Interest expense500585
Income before taxes$1,600$2,315
Taxes (40%)640926
Net income$960$1,389
Dividends$280$300
Change in retained earnings$680$1,089
EPS$1.92$2.78
DPS$0.56$0.60
# of shares outstanding (millions)500500

Davenport determines that the company follows IFRS rules, and compiles the following industry price-to-adjusted (per share) CFO data, where adjusted CFO is equal to cash flow from operations from the statement of cash flows plus after-tax cash interest expense.

Exhibit 3: Industry Data


[td=1,1,189]

Trailing

P/Adjusted CFO per share

Beta

Consensus 5-Year Earnings Growth

Industry Median

2.0x

1.20

9.9%

Sanford


[td=1,1,60]

1.25

9.2%



Davenport would also like to make international price multiple comparisons and is contemplating using one or more of the following ratios: price-to-sales, price-to-earnings, price-to-book, price-to-adjusted cash flow from operations, and enterprise value-to-EBITDA.
Davenport decides to use a single-stage residual income model to estimate the value of Sanford, in addition to the FCFE framework he used earlier. He estimates Sanford’s long-term perpetual growth rate in residual income at 5 percent, its return on new investments to be 20 percent, weighted average cost of capital to be 10.4 percent based on the target debt-to-asset ratio, and the required return on equity to be 14 percent.
Finally, Davenport solves the following equation for T, given the other inputs (where the index is the S&P 500), and determines that T = 3.6.
Sanford’s economic value added (EVA®) for 2008 is closest to:
A)
$567.80
B)
$1,383.20
C)
$356.80

EVA is equal to net operating profit after tax (NOPAT) minus the dollar weighted average cost of capital ($WACC).
NOPAT = EBIT(1 + t) = $2,900(1 − 0.4) = $1,740
Invested capital = LTD + SH equity = $6,111 + $7,189 = $13,300
$WACC = $13,300 × 0.104 = $1,383.20
EVA = $1,740 − $1,383.20 = $356.80
(Study Session 12, LOS 42.a)

Based on a comparison of the actual trailing P/FCFE ratio compared to the justified trailing P/FCFE ratio (based on Davenport’s FCFE valuation model) for 2008, Sanford is:
A)
undervalued because the actual P/FCFE ratio is less than the justified P/FCFE ratio for 2008.
B)
overvalued because the actual P/FCFE ratio is greater than the justified P/FCFE ratio for 2008.
C)
correctly valued because the actual P/FCFE ratio is equal to the justified P/FCFE ratio for 2008.


Sanford’s actual P/FCFE ratio is the current market price of $15 divided by FCFE for 2008:

The justified P/FCFE ratio is the value derived from the FCFE valuation model ($11.18) divided by FCFE for 2008:

Based on this analysis, Sanford is overvalued on an absolute basis (NOT relative to the industry benchmark) because the actual P/FCFE ratio is greater than the justified P/FCFE ratio. (Study Session 12, LOS 41.b)

Based on a comparison of the actual trailing P/adjusted CFO ratio compared to the industry median trailing P/adjusted CFO per share ratio for 2008, Sanford:
A)
is overvalued relative to the industry benchmark because Sanford’s P/adjusted CFO ratio is higher than the industry median, despite slightly higher systematic risk and lower 5-year earnings growth.
B)
may be undervalued relative to the industry benchmark because Sanford’s P/adjusted CFO ratio is higher than the industry median, despite slightly higher systematic risk and lower 5-year earnings growth.
C)
is correctly valued relative to the industry benchmark because Sanford’s P/adjusted CFO ratio is equal to the industry median, despite slightly higher systematic risk and lower 5-year earnings growth.

Sanford’s adjusted CFO is equal to net income plus depreciation minus the increase in net working capital (excluding cash and notes payable) plus after-tax interest expense:

Sanford is overvalued relative to the industry benchmark because its P/adjusted CFO ratio is higher than the industry median of 2.0, despite slightly higher systematic risk (as measured by beta) and a lower 5-year earnings growth forecast. (Study Session 12, LOS 41.m)

Which of the following market multiples is most appropriate for Davenport to use in international valuation comparisons?
A)
Price-to-sales.
B)
Price-to-adjusted CFO.
C)
Enterprise value-to-EBITDA.

Using relative valuation methods that require the use of comparable firms is challenging in an international context due to differences in accounting methods, cultures, risk, and growth opportunities. Further, benchmarking is difficult because price multiples for individual firms in the same industry vary widely internationally, and country market price multiples can vary significantly. Common differences in international accounting treatment fall into several categories: goodwill, deferred income taxes, foreign exchange adjustments, R&D, pension expense, and tangible asset revaluations.
The usefulness of all price multiples is affected to some degree by differences in international accounting standards. The least affected are price-to-cash flow ratios (including P/adjusted CFO), while P/B, P/E, P/S, P/EBITDA, and EV/EBITDA will be more seriously affected because they are more affected by management’s choice of accounting methods and estimates. (Study Session 12, LOS 41.o)

The value per share of Sanford’s common equity, based on a single-stage residual income model, is closest to:
A)
$23.96.
B)
$22.44.
C)
$21.24.


Book value per share for 2008 is:

The value of the common equity according to the single-stage residual income model is:

(Study Session 12, LOS 42.f)

For purposes of this question only, assume Sanford’s ROE is 20%, its current market price is $25, and the cost of equity is 14%. Sanford’s implied growth rate in residual income is closest to:
A)
5.11%.
B)
5.88%.
C)
5.23%.


BVPS = 7,189 / 500 = $14.38
The implied growth rate can be calculated as:

(Study Session 12, LOS 42.g)
作者: anshultongia    时间: 2012-3-31 14:44

An analyst begins an equity analysis of Company A by estimating future cash flows, discounting them back to the present, and dividing the result by the outstanding number of shares. This analyst is most likely using the:
A)
the method of comparables.
B)
the method of forecasted fundamentals.
C)
technical analysis.


This analysis is comparing forecasted discounted cash flows (DCF) to a fundamental variable (shares). This suggests the method for forecasted fundamentals.
作者: anshultongia    时间: 2012-3-31 14:45

Which of the following valuation approaches is based on the rationale that stock values differ due to differences in the expected values of variables such as sales, earnings, or related growth rates?
A)
Method of comparables.
B)
Free cash flow to the firm.
C)
Method of forecasted fundamentals.


The method of forecasted fundamentals is based on the rationale that stock values differ due to differences in the expected values of fundamentals such as sales, earnings, or related growth rates.
作者: anshultongia    时间: 2012-3-31 14:45

Which of the following statements about the method of comparables in price multiple valuation is CORRECT?
A)
It relates multiples to company fundamentals using a discounted cash flow (DCF) model.
B)
It values an asset relative to a benchmark value of the multiple.
C)
It assumes that cash flows are related to fundamentals.


The method of comparables involves using a price multiple to evaluate whether an asset is valued properly relative to a benchmark value of the multiple. It makes no explicit assumptions about fundamentals and does not rely on a DCF model.
作者: anshultongia    时间: 2012-3-31 14:45

Which of the following statements about the method of forecasted fundamentals in price multiple valuation is most accurate?
A)
It relates multiples to company fundamentals using a discounted cash flow (DCF) model.
B)
It values an asset relative to a benchmark value of the multiple.
C)
It relies on the Law of One Price.


The method of forecasted fundamentals relates multiples to company fundamentals using a DCF method. It does not explicitly rely on the Law of One Price. Further, it does not typically focus on benchmarks.
作者: anshultongia    时间: 2012-3-31 14:46

P/E multiples are often computed using the average of the multiples of comparable firms, because:
A)
it provides the most accurate results.
B)
it is very easy to find comparable firms that have the same business mix and risk and growth profiles.
C)
it is conceptually very straightforward.


The use of comparable firms is quite common, because it is conceptually very straightforward. Also, it does not require the analyst to make specific assumptions regarding growth, risk, and other variables. However, it is often difficult to find comparable firms, since even within the same industry different firms can have different business mixes and risk and growth profiles.
作者: anshultongia    时间: 2012-3-31 14:46

The value of a firm, calculated using the discounted cash flow (DCF) method, will be closest to the valuation using P/E multiples when P/E multiples are estimated using:
A)
P/E multiples of comparable firms.
B)
historical P/E multiples.
C)
fundamental data.


In the DCF valuation method, an analyst makes specific assumptions about each variable, such as growth, risk, payout, etc. The valuation using P/E multiples will be closest to the one obtained using the DCF approach when fundamental data -- for growth, risk, payout, etc. -- is used to estimate P/E multiples.
作者: anshultongia    时间: 2012-3-31 14:47

A justified price multiple is the:
A)
multiple implied by historical growth.
B)
warranted or intrinsic price multiple.
C)
multiple implied by the market price.


A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.
作者: anshultongia    时间: 2012-3-31 14:47

The warranted or intrinsic price multiple is called the:
A)
justified price multiple.
B)
multiple implied by the market price.
C)
multiple implied by historical growth.


A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.
作者: anshultongia    时间: 2012-3-31 14:48

The multiple indicated by applying the discounted cash flow (DCF) model to a firm’s fundamentals is necessarily the:
A)
justified price multiple.
B)
same as the average industry multiple.
C)
result of calculating retention/(required rate of return - growth) for the overall market.


A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple. The question is limited to an individual firm and does not necessarily apply to the market or an industry.
作者: anshultongia    时间: 2012-3-31 14:48

An argument against using the price-to-sales (P/S) valuation approach is that:
A)
P/S ratios are not as volatile as price-to-earnings (P/E) multiples.
B)
P/S ratios do not express differences in cost structures across companies.
C)
sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value.


P/S ratios do not express differences in cost structures across companies. Both remaining responses are advantages of the P/S ratios, not disadvantages
作者: anshultongia    时间: 2012-3-31 14:49

Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation?
A)
Book value is often positive, even when earnings are negative.
B)
Book values are very meaningful for firms in service industries.
C)
PBV ratios can be compared across similar firms if accounting standards are consistent.


Book values are NOT very meaningful for firms in service industries.
作者: anshultongia    时间: 2012-3-31 14:51

Which of the following is a disadvantage of using the price-to-book value (PBV) ratio?
A)
Book value may not mean much for manufacturing firms with significant fixed costs.
B)
Firms with negative earnings cannot be evaluated with the PBV ratios.
C)
Book values are affected by accounting standards, which may vary across firms and countries.


The disadvantages of using PBV ratios are:
作者: anshultongia    时间: 2012-3-31 14:51

Which of the following is a disadvantage of using price-to-sales (P/S) multiples in stock valuations?
A)
It is difficult to capture the effects of changes in pricing policies using P/S ratios.
B)
The use of P/S multiples can miss problems associated with cost control.
C)
P/S multiples are more volatile than price-to-earnings (P/E) multiples.


Due to the stability of using sales relative to earnings in the P/S multiple, an analyst may miss problems of troubled firms concerning its cost control. P/S multiples are actually less volatile than P/E ratios, which is an advantage in using the P/S multiple. Also, P/S ratios provide a useful framework for evaluating effects of pricing changes on firm value.
作者: JonnyKay    时间: 2012-3-31 14:56

An argument for using the price-to-earnings (P/E) valuation approach is that:
A)
earnings can be negative.
B)
management discretion increases the reliability of the ratio.
C)
earnings power is the primary determinant of investment value.


Earnings power is the primary determinant of investment value. Both remaining factors reduce the usefulness of the P/E approach
作者: JonnyKay    时间: 2012-3-31 14:57

A firm is better valued using the discounted cash flow approach than the P/E multiples approach when:
A)
earnings per share are negative.
B)
expected growth rate is very high.
C)
dividend payout is low.


P/E multiples are not meaningful when the earnings per share are negative. While this problem can be partially offset by using normalized or average earnings per share, the problem cannot be eliminated.
作者: JonnyKay    时间: 2012-3-31 14:58

One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:
A)
profit margins are not consistent across firms within an industry.
B)
P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes.
C)
sales are relatively stable and might not change even though earnings and value might change significantly.


The stability of sales (relative to earnings and book value) can be a disadvantage. For example, revenues may remain stable but earnings and book values can drop significantly due to a sharp increase in expenses.
作者: JonnyKay    时间: 2012-3-31 14:59

One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:
A)
profit margins are not consistent across firms within an industry.
B)
P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes.
C)
sales are relatively stable and might not change even though earnings and value might change significantly.


The stability of sales (relative to earnings and book value) can be a disadvantage. For example, revenues may remain stable but earnings and book values can drop significantly due to a sharp increase in expenses.
作者: JonnyKay    时间: 2012-3-31 15:00

An argument against using the price-to-earnings (P/E) valuation approach is that:
A)
earnings can be negative.
B)
research shows that P/E differences are significantly related to long-run average stock returns.
C)
earnings power is the primary determinant of investment value.


Negative earnings render the P/E ratio useless. Both remaining factors increase the usefulness of the P/E approach.
作者: JonnyKay    时间: 2012-3-31 15:00

An analyst focusing mostly on financial stocks is likely to prefer valuing stocks via the:
A)
price/sales ratio.
B)
dividend yield.
C)
price/book ratio.


The price/book ratio is a preferred tool for valuing financial stocks.
作者: JonnyKay    时间: 2012-3-31 15:00

Bill Whelan and Chad Delft are arguing about the relative merits of valuation metrics.
Whelan: “My ratio is less volatile than most, and it works particularly well when I look at stocks in cyclical industries.”
Delft: “The problem with your ratio is that it doesn’t reflect differences in the cost structures of companies in different industries. I like to use a metric that strips out all the fluff that distorts true company performance.”
Whelan: “People can’t even agree how to calculate your ratio.”
Which valuation metric do the analysts most likely prefer?
WhelanDelft
A)
Price/salesPrice/cash flow
B)
Price/bookEV/EBITDA
C)
Price/cash flowPrice/book


The price/sales ratio is not very volatile, and it is of particular value when dealing with cyclical companies. The price/cash flow ratio considers the stock price relative to cash flows, ignoring the noncash gains and losses that can skew earnings. A major weakness of the price/cash flow ratio is the fact that there are different ways of calculating it, making comparisons difficult at times.
作者: JonnyKay    时间: 2012-3-31 15:01

Analyst Ariel Cunningham likes using the price/earnings ratio for valuation purposes because studies have shown it is very effective at identifying undervalued stocks. However, she has one main problem with the statistic – it doesn’t work when a company loses money. So Cunningham is considering switching to a different core valuation metric. Given Cunningham’s rationale for using the price/earnings ratio, which option would be her best alternative?
A)
Price/book.
B)
Price/cash flow.
C)
Price/sales.


Book value is usually positive, but not always. Cash flow is often negative. If the reason Cunningham wants to stop using the P/E ratio is that it does not work for unprofitable companies, her best option is a ratio base on sales, which are positive in all but the rarest of instances.
作者: JonnyKay    时间: 2012-3-31 15:01

An argument for using the price-to-earnings (P/E) valuation approach is that:
A)
research shows that P/E differences are significantly related to long-run average stock returns.
B)
earnings volatility facilitates interpretation.
C)
earnings can be negative.


Research shows that P/E differences are significantly related to long-run average stock returns. Both remaining factors reduce the usefulness of the P/E approach.
作者: JonnyKay    时间: 2012-3-31 15:02

Analysts and portfolio managers at Big Picture Investments are having their weekly investment meeting. CEO Bob Powell, CFA, believes the firm’s portfolios are too heavily weighted toward growth stocks. “I expect value to make a comeback over the next 12 months. We need to get more value stocks in the Big Picture portfolios." Four of Powell’s analysts, all of whom hold the CFA charter, were at the meeting – Laura Barnes, Chester Lincoln, Zelda Marks, and Thaddeus Bosley. Powell suggested Big Picture should start selecting stocks with the lowest price-to-earnings (P/E) multiples. Here are the analysts’ comments:
Powell has provided Barnes with a group of small-cap stocks to analyze. The stocks come from a variety of different sectors and have widely different financial structures and growth profiles. She has been asked to determine which of these stocks represent attractive values. She is considering four possible methods for the job:Which analyst’s quote is least accurate?
A)
Lincoln’s.
B)
Bosley’s.
C)
Barnes’.


Book value must be adjusted constantly, and it is generally more complicated to calculate than earnings. The other three statements are true. (Study Session 12, LOS 41.c)
Barnes is contemplating the use of a price/earnings ratio to value a start-up medical technology firm. Which of the following is the most compelling reason not to use the P/E ratio?
A)
The company is likely to be unprofitable.
B)
P/E ratios for medical-technology firms with different specialties are not comparable.
C)
Earnings per share are not a good determinant of investment value for medical-technology companies.


Earnings are the chief determinant of value for most companies, including med-tech. P/E is the most common valuation method and the best known by lay investors. Comparability of P/E ratios across industries is always problematic, but not as much so for within the med-tech industry. A start-up company is very likely to have negative earnings, which renders the P/E ratio useless. (Study Session 12, LOS 41.c)
Based on their responses to Powell, which of the analysts is most likely concerned about earnings volatility?
A)
Lincoln.
B)
Bosley.
C)
Barnes.


Book value tends to be more stable than earnings. Therefore, Lincoln’s favorite valuation tool, the P/B ratio, is less volatile than the P/E. The P/S ratio tends to be less volatile than the P/E as well, but Bosley’s other favorite, earnings yield, is just as volatile. The method preferred by Barnes is likely to be more volatile than the P/B ratio. (Study Session 12, LOS 41.c)
Based on their responses to Powell, which of the analysts has proposed a method that has the best chance to work for determining the relative value start-up companies?
A)
Marks.
B)
Bosley.
C)
Lincoln.


Start-up companies tend to be unprofitable, and also often have negative free cash flow. Book value has some predictive power for such companies, but this is also often negative for new and unprofitable companies. The price/sales ratio, one of Bosley’s favorites, is the only metric that will work even if earnings, cash flows, and book value are negative. (Study Session 12, LOS 41.c, d)
Barnes would be least likely to use EV/EBITDA ratio, rather than the P/E ratio, when analyzing a company that:
A)
reports a lot of depreciation expense.
B)
has a different capital structure than most of its peers.
C)
pays a dividend, and is likely to deliver little earnings growth.


For companies that report a lot of depreciation expense or must be compared to companies with different levels of financial leverage, the EV/EBITDA ratio may be more useful than the P/E. For companies that pay a dividend and have little profit growth, both should work fine. Given Barnes’ stated preference for the P/E ratio, she is least likely to use the EV/EBITDA ratio with the dividend-paying firm. (Study Session 12, LOS 41.c)
Barnes is considering the four methods previously described to analyze the small-cap stocks provided to her by Powell. For which method does Barnes provide the weakest justification?
A)
The price/sales ratio.
B)
The mean P/E of S&P 500 companies.
C)
The PEG ratio.


No valuation method will work dependably across all types of stocks. The four Barnes proposed are probably as good as any. But the PEG ratio does not correct for risk – it works as a comparison tool only if the companies have similar expected risks and returns. The other justifications are reasonable. (Study Session 12, LOS 41.c)
作者: JonnyKay    时间: 2012-3-31 15:03

Beachwood Builders merged with Country Point Homes in December 31, 1992. Both companies were builders of mid-scale and luxury homes in their respective markets. On December 31, 2002, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point to its shareholders.
The following information is available to Bernheim’s investment bankers:
The following table for Country Point is also available for analysis

$ (in millions)

2002

2003

2004

2005

2006


Net Income
10
15
20
25
30

Depreciation
5
6
5
6
5

Capital Expenditures
7
8
9
10
12
Bernheim’s investment bankers have determined that the value of Country Point to be $162.6 million and to effect the spin-off, it was appropriate for Beachwood to issue its common shareholders two shares in Country Point for each share that its current shareholders held. The appropriate initial offering price per share for the spin-off to Beachwood’s shareholders should be:
A)
$16.26.
B)
$14.45.
C)
$32.50.


Since the shareholders receive two shares of the spin-off for every share they currently hold, each Beachwood common shareholder would receive two common shares of Country Point. At December 31, 2002, Beachwood had 5 million shares. Therefore, 10 million common shares were to be issued for the spin-off. If the value of the spin-off was valued at $162.6 million and divided by 10 million, you will arrive at a spin-off price per share of $16.26 (= $162.6 million / 10 million).
Immediately after the spin-off, Country Point’s book value per share would be:
A)
$5.56.
B)
$16.25.
C)
$11.12.


The allocated common equity or book value of Country Point was $55.6 million at year-end 2002 and 10 million shares were allocated for the spin-off. The book value would be $5.56 per share (= $55.6 million / 10 million).
Based on the initial offering price of the spin-off, the estimated price-to-book (P/B) ratio is:
A)
2.92 times.
B)
2.00 times.
C)
1.46 times.


The P/B ratio is determined by taking the spin-off price and dividing it by the book value per share (BVPS). Hence, the ratio is 2.92 × book (= $16.26 per share spin-off price / $5.56 BVPS).
Based on Bernheim’s careful analysis, comparable firms to Country Point trade at a P/B ratio of 3.5 times. The expected price per share of the spin-off assuming a liquid and efficient market for Country Point’s common shares would be:
A)
$56.88.
B)
$38.92.
C)
$19.46.


If we assume that the comparable P/B ratio is 3.5 times, then we simply multiply the book value by 3.5 to arrive at $19.46 ($5.56 × 3.5).
作者: JonnyKay    时间: 2012-3-31 15:04

The trailing price-to-earnings (P/E) ratio is defined as:
A)
price to next period's expected earnings.
B)
the average P/E over the last five years.
C)
price to most recent earnings.


The trailing P/E ratio is price to most recent realized earnings.
作者: JonnyKay    时间: 2012-3-31 15:05

At a CFA society function, Andrew Caza comments to Nanda Dhople that the expected dividend growth rate (g) for Zeron Enterprises Inc (ZEI) is expected increase 0.5% from 6% to 6.5%. Caza claims that since ZEI will maintain their historic dividend payout ratio (g) of 50% and cost of equity (k) of 10%, ZEI's P/E ratio will also increase by 0.5%. Is Caza correct?
A)
No, ZEI's P/E ratio will decrease by approximately 14.32%.
B)
No, ZEI's P/E ratio will increase by approximately 14.32%.
C)
Yes, ZEI's P/E ratio will increase by approximately 0.5%.


Caza is not correct. P/EZEI = payout ratio / (k - g)
When the expected dividend growth is 6%, P/E = 0.50 / (0.10 - 0.06) = 12.50
When the expected dividend growth is 6.5%, P/E = 0.50 / (0.10 - 0.065) = 14.29
The percentage change is (14.29 / 12.50) - 1 = 14.32%, representing a 14.32% increase.
作者: JonnyKay    时间: 2012-3-31 15:05

At a CFA society function, Robert Chan comments to Li Chiao that the expected dividend growth rate for Xanedu Industries has decreased 0.5% from 6.0% to 5.5%. Chan claims that since Xanedu will maintain their historic dividend payout ratio (g) of 40% and required return on equity (r) of 12%. Xanedu's justified leading P/E ratio based on forecasted fundamentals will also decrease by 0.5%. Is Chan correct?
A)
No, Xanedu's justified leading P/E ratio will decrease by approximately 7.8%.
B)
Yes, Xanedu's justified leading P/E ratio will increase by approximately 0.5%.
C)
No, Xanedu's justified leading P/E ratio will increase by approximately 7.8%.


Chan is not correct. P/EXanedu = payout ratio / (r - g)
When the expected dividend growth is 6%, P/E = 0.40 / (0.12 - 0.06) = 6.67
When the expected dividend growth is 5.5%, P/E = 0.40 / (0.12 - 0.055) = 6.15
The percentage change is (6.15 / 6.67) - 1 = -7.80%, representing a 7.80% decrease.
作者: JonnyKay    时间: 2012-3-31 15:07

Robin Alberts, CFA, is the head of research for Worth Brothers, a large investment company based in New York. Next week, a group of analysts who have just completed the Worth Brothers’ management training program will begin rotating throughout the various departments and trading desks at the firm. The trainees will be split into small groups, and each group will spend four weeks in each area to learn the basic operations of each department through “hands on” experience. Also, in that time period, each department head is expected to fully evaluate each candidate in order to determine their future placement within the firm.
Alberts decides that she should begin every rotation in the research department by giving each candidate a brief review exam to test their knowledge of the general principles of credit analysis. She asks each candidate to analyze the following three scenarios and to answer two questions on each scenario.

Scenario One


Firm A

Firm B

Firm C

Firm D


Payout Ratio

75%

--

--

--


Required Rate of Return

12%

12%

12%

12%


Return on Equity (ROE)

20%

15%

30%

14%


Price-to-book Value (PBV) Ratio

--

3.00

0.70

3.50


Scenario Two
Cost of Capital Measures for Brown, Inc.


Risk-Free Rate

5%


Expected Return on the Market

12%


Beta

1.5


Tax Rate

40%


Cost of Debt

10%


Proportion of the Firm Financed with Debt

20%


Proportion of the Firm Financed with Equity

80%


Scenario Three
The Donner Company
as of December 31, 2003
(in $ millions)


Cash

38



Current Liabilities

52


Accounts Receivable

120



Long-term Bonds

123


Inventory

57



Common Stock

75


Property, Plant & Equip.

218



Retained Earnings

183


Total Assets

433



Total Liabilities & Equity

433



2001

2002

2003


Operating Profit (EBIT)

42

38

43


Interest Expense

16

17

20


Relevant Industry Ratios

Long-term Debt-to-equity Ratio: 0.52

Current Ratio: 3.20

Interest Coverage Ratio: 2.10
Using the information in scenario one which of the following items would increase firm A's PBV?
A)
Decrease ROE.
B)
A larger spread between ROE and the required rate of return (r).
C)
Increase r.


To increase the PBV do one of the following:
(Study Session 12, LOS 41.d)

Using the information from scenario one which of the following items would decrease Firm A's PBV?
A)
Increase r.
B)
Increase ROE.
C)
Increase the spread between ROE and r.


To decrease the PBV do one of the following:
(Study Session 12, LOS 41.d)

Using the information in scenario two, what is the cost of equity capital of Brown, Inc.?
A)
12.0%.
B)
15.5%.
C)
10.5%.


Use the capital asset pricing model (CAPM) to compute the cost of equity capital as follows:
Kequity = 5% + (1.5)(12% - 5%) = 15.5%.
(Study Session 11, LOS 38.d)

Using the information in scenario two, what is the weighted-average cost of capital (WACC) of Brown, Inc.?
A)
9.86%.
B)
13.60%.
C)
14.40%.


WACC = (proportion of firm financed with equity)(cost of equity) + (proportion of firm financed with debt)(cost of debt)(1 − tax rate) = (0.8)(15.5%) = (0.2)(10%)(1 − 0.4) = 13.6%.
(Study Session 11, LOS 38.d)

Using the information in scenario three, what should Mansted observe about Donner’s solvency and debt capitalization?
A)
Both Donner's solvency and debt capitalization ratios are better than the industry average.
B)
Donner's solvency ratio is worse but its debt capitalization is better than the industry average.
C)
Donner's solvency ratio is better but its debt capitalization is worse than the industry average.


Donner’s current ratio of (38 + 120 + 57) / 52 = 4.13 is higher (better) than the industry average of 3.2. Donner’s long-term debt-to-equity ratio of 123 / (75 + 183) = 0.48 is lower (better) than the industry average of 0.52. (Study Session 14, LOS 48.c)
Using the information in scenario three, what should Mansted observe about Donner’s ability to make its interest payments? Donner’s interest coverage ratio is:
A)
declining (worsening) over time but is still above the industry average.
B)
declining (worsening) over time and is below the industry average.
C)
rising (improving) over time and is above the industry average.


Donner’s interest coverage ratio (42 / 16 = 2.625 in 2001, 38 / 17 = 2.235 in 2002, and 2.150 in 2003) is declining from year to year but is still above the industry average of 2.10. (Study Session 14, LOS 48.d)
作者: JonnyKay    时间: 2012-3-31 15:07

Underlying earnings may be defined as earnings:
A)
that exclude non-recurring components.
B)
that include non-recurring components.
C)
net of capital expenditures needed to keep the business productive.


Underlying earnings are earnings that exclude non-recurring items. They are also known as persistent, continuing, or core earnings.
作者: JonnyKay    时间: 2012-3-31 15:08

Glad Tidings Gifts (GTG) recently reported a representative annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG’s trailing price to earnings (P/E) for valuation purposes?
A)
19.69.
B)
22.22.
C)
25.51.


Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $2.25 + $0.17 + $0.12 = $2.54. The resulting trailing P/E = 50.00 / 2.54 = 19.69.
作者: JonnyKay    时间: 2012-3-31 15:08

Alpha Software (AS) recently reported a representative annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS’s trailing price to earnings (P/E) for valuation purposes?
A)
37.14.
B)
44.52.
C)
31.86.


Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $1.75 + $0.19 + $0.10 = $2.04. The resulting trailing P/E = 65.00 / 2.04 = 31.86.
作者: JonnyKay    时间: 2012-3-31 15:09

The goal of normalizing earnings is to adjust for:
A)
seasonal elements.
B)
non-cash charges.
C)
cyclical elements.


The goal of normalizing earnings is to adjust for cyclical elements.
作者: JonnyKay    时间: 2012-3-31 15:09

Which of the following statements about cyclical firms is least accurate?
A)
The price-to-earnings (P/E) multiple of a cyclical firm normally peaks at the depths of recession and bottoms out at the peak of economic boom.
B)
The problems encountered when using the price-to-earnings (P/E) multiples of cyclical firms can be completely eliminated by using average or normalized earnings.
C)
Cyclical firms have volatile earnings, and their price-to-earnings (P/E) multiple is not very useful for valuation.


The P/E multiples for cyclical firms are not very useful for valuation. Earnings will follow the economy, and prices will reflect expectations about the future. Thus, most of the time, the P/E multiple of a cyclical firm will peak at the depths of recession and bottom out at the peak of an economic boom. This problem can be minimized to some extent by using average or normalized earnings but will not be eliminated completely.
作者: JonnyKay    时间: 2012-3-31 15:09

A method commonly used to normalize earnings is the method of:
A)
comparables.
B)
historical average earnings per share (EPS).
C)
average return on assets.


A common method in normalizing earnings uses the historical average EPS.
作者: JonnyKay    时间: 2012-3-31 15:10

The average return on equity (ROE) earnings normalization method relies on:
A)
average ROE over the most recent cycle.
B)
average earnings per share (EPS) over the most recent cycle.
C)
the earnings yield.


The average return on equity normalization method normalizes EPS as the average ROE over the most recent full cycle multiplied by book value per share.
作者: JonnyKay    时间: 2012-3-31 15:10

A common pitfall in interpreting earnings yields in valuation is:
A)
using underlying earnings.
B)
look-ahead bias.
C)
using negative earnings.


A common pitfall is look-ahead bias, wherein the analyst uses information that was not available to the investor when calculating the earnings yield.
作者: JonnyKay    时间: 2012-3-31 15:10

The observation that negative price to earnings (P/E) ratios are meaningless and prices are never negative is used to justify which valuation approach?
A)
Dividend discount model.
B)
Earnings yield.
C)
Dividend yield.


The observation is used to justify the earnings yield approach. Negative P/E ratios are meaningless. In such cases, it is common to use normalized earnings per share (EPS) and/or restate the ratio as the earnings yield or E/P because price is never negative. Price to earnings (P/E) ranking can then proceed as usual.
作者: JonnyKay    时间: 2012-3-31 15:11

A common justification for using earnings yields in valuation is that:
A)
negative earnings render P/E ratios meaningless and prices are never negative.
B)
earnings are more stable than dividends.
C)
earnings are usually greater than free cash flows.



Negative earnings render P/E ratios meaningless. In such cases, it is common to use normalized earnings per share (EPS) and/or restate the ratio as the earnings yield or E/P because price is never negative. Price to earnings (P/E) ranking can then proceed as usual.
作者: JonnyKay    时间: 2012-3-31 15:11

An increase in profit margin will cause a price-to-sales (P/S) multiple to increase if:
A)
the required rate of return increases.
B)
there is insufficient information to tell.
C)
the growth rate in sales does not decrease proportionately.


An increase (decrease) in the profit margin increases (decreases) the growth rate if sales do not decrease (increase) proportionately. Increases in the required rate of return would decrease the P/S ratio. This is clear in the expression for trailing P/S:
P0 / S0 = [(E0 / S0)(1 – b)(1 + g)] / (r – g)
作者: JonnyKay    时间: 2012-3-31 15:12

An increase in return on equity (ROE) will cause a price-to-book (P/B) multiple to:
A)
decrease.
B)
increase.
C)
there is insufficient information to tell.


An increase in ROE should increase the price to book (P/B) ratio:
P0 / B0 = (ROE – g) / (r – g)
作者: JonnyKay    时间: 2012-3-31 15:12

An increase in return on equity (ROE) will cause a price-to-earnings (P/E) multiple to:
A)
there is insufficient information to tell.
B)
decrease.
C)
increase.


An increase in ROE will increase growth through the g = (ROE × retention) relation. Thus, as growth increases, the following expression for trailing P/E should increase:
P0/E0 = [(1 – b)(1 + g)] / (r – g)
Note that the topic review does not allow for any interactive relationship between leverage, ROE, and growth. Thus, no explicit consideration is given to whether the increase in ROE results from risk-increasing leverage that could cause an offsetting increase in the required rate of return
作者: JonnyKay    时间: 2012-3-31 15:13

The price-to-book value (PBV) ratio for a high-growth firm will:
A)
increase as the growth rate in either the high-growth or stable-growth period increases.
B)
increase as the growth rate in either the high-growth or stable-growth period decreases.
C)
increase as the growth rate in the high-growth period increases and decrease as the growth rate in the stable-growth period increases.


The PBV ratio for a high-growth firm will be determined by growth rates in earnings in both the high-growth and stable-growth periods. The PBV ratio increases as the growth rate increases in either period.
作者: JonnyKay    时间: 2012-3-31 15:13

The net impact of an increase in payout ratio on price-to-book value (PBV) ratio cannot be determined because it might also:
A)
decrease the market value of the firm.
B)
decrease expected growth.
C)
decrease required rate of return.


If payout increases, the growth of the firm may slow down, because internally generated funds are not being invested in new, profitable projects. Hence, the net impact on the PBV ratio from change in payout ratio cannot be determined.
作者: JonnyKay    时间: 2012-3-31 15:13

An increase in financial leverage will cause the trailing price-to-earnings (P/E) multiple to:
A)
decrease.
B)
increase.
C)
there is insufficient information to tell.


An increase in financial leverage will cause the required rate of return to increase, thereby decreasing the P/E. This is clear in the expression for trailing P/E:
P0 / E0 = [(1 – b)(1 + g)] / (r – g)
(Note: the topic review does not allow for any interactive relationship between leverage, return on equity (ROE), and growth. Thus, no explicit consideration is given to whether the increase in leverage would increase ROE and therefore growth through the g = (ROE × retention) relationship
作者: JonnyKay    时间: 2012-3-31 15:14

An increase in growth will cause a price-to-earnings (P/E) multiple to:
A)
there is insufficient information to tell.
B)
decrease.
C)
increase.


An increase in growth will decrease the denominator and increase the numerator in the trailing P/E expression, both of which should increase the P/E ratio:
P0/E0 = [(1 – b)(1 + g)] / (r – g)
Note that the topic review does not allow for any interactive relationship between retention and growth. Thus, no explicit consideration is given to how the growth increase was generated.
作者: JonnyKay    时间: 2012-3-31 15:14

An increase in growth will cause a price to cash flow multiple to:
A)
decrease.
B)
there is insufficient information to tell.
C)
increase.

An increase in growth increases the price to cash flow ratio (CF), as indicated by the following expression:
P0 / CF0 = (1 + g) / (r – g)
作者: JonnyKay    时间: 2012-3-31 15:15

A decrease in the earnings retention rate will cause a price-to-sales (P/S) multiple to:
A)
decrease.
B)
remain the same.
C)
increase.


A decrease in the earnings retention rate will increase the following expression for P/S due to the implied increase in the payout ratio, which is (1 – b):
P0 / S0 = [(E0 / S0)(1 – b)(1 + g)] / (r – g)
Note that the topic review does not allow for any interactive relationship between retention and growth. Thus, no explicit consideration is given to whether the increase in the payout ratio will cause an offsetting decrease in growth.
作者: JonnyKay    时间: 2012-3-31 15:15

All other variables held constant, the justified price-to-book multiple will decrease with a decrease in:
A)
expected growth rate.
B)
payout ratio.
C)
required rate of return.


All other variables held constant, a decrease in expected growth rate will result in a decrease in the justified price-to-book multiple.
作者: JonnyKay    时间: 2012-3-31 15:15

An increase in which of the following variables will least likley result in a corresponding increase in the price-to-book value (PBV) ratio for a high-growth firm?
A)
Required rate of return
B)
Payout ratios.
C)
Growth rates in earnings.


The PBV ratio decreases as the required rate of return increases.
作者: JonnyKay    时间: 2012-3-31 15:16

What is the justified leading price-to-earnings (P/E) multiple of a stock that has a retention ratio of 60% if the shareholders require a return of 16% on their investment and the expected growth rate in dividends is 6%?
A)
4.00.
B)
6.36.
C)
4.24.


P0/E1 = 0.40 / (0.16 – 0.06) = 4.00
作者: JonnyKay    时间: 2012-3-31 15:16

An analyst has gathered the following data about the Garber Company:
What will be the appropriate price-to-book value (PBV) ratio for the Garber Company based on return differential?
A)
0.58.
B)
1.38.
C)
1.73.


The estimated growth rate is 6.7% [0.1675 × (1 − 0.60)] and PBV ratio based on rate differential will be:
P0 / BV0 = (ROE1 − g) / (r − g) = (0.1675 − 0.067) / (0.125 − 0.067) = 1.73.
作者: JonnyKay    时间: 2012-3-31 15:17

The following data was available for Morris, Inc., for the year ending December 31, 2001:
If the expected growth rate in dividends and earning is 4%, what will the appropriate price-to-sales (P/S) multiple be for Morris?
A)
0.037.
B)
0.114.
C)
0.109.


Profit Margin = EPS / Sales per share = 1.75 / 150 = 0.01167 or 1.167%.
Payout ratio = 1 − (g / ROE) = 1 − (0.04 / 0.16) = 0.75 or 75%.
P0 / S0 = [profit margin × payout ratio × (1 + g)] / (r − g) = [0.01167 × 0.75 × 1.04] / (0.12 − 0.04) = 0.11375.
作者: JonnyKay    时间: 2012-3-31 15:17

The Farmer Co. has a payout ratio of 65% and a return on equity (ROE) of 16% (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% and the required rate of return is 13%?
A)
1.41.
B)
1.48.
C)
0.71.


Based on return differential:
P0 / BV0 = (ROE1 − g) / (r − g) = (0.16 − 0.056) / (0.13 − 0.056) = 1.41.
作者: invic    时间: 2012-3-31 15:19

What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40% if the shareholders require a return of 16% on their investment and the expected growth rate in dividends is 6%?
A)
4.24.
B)
4.00.
C)
6.36.


P0/E0 = (0.40 × 1.06) / (0.16 – 0.06) = 4.24
作者: invic    时间: 2012-3-31 15:19

A firm has a payout ratio of 35%, a return on equity (ROE) of 18%, an estimated growth rate of 13%, and its shareholders require a return of 17% on their investment. Based on these fundamentals, a reasonable estimate of the appropriate price-to-book value ratio for the firm is:
A)
2.42.
B)
1.25.
C)
1.58.


作者: invic    时间: 2012-3-31 15:20

The Lewis Corp. had revenue per share of $300 in 2001, earnings per share of $4.50, and paid out 60% of its earnings as dividends. If the return on equity (ROE) and required rate of return of Lewis are 20% and 13% respectively, what is the appropriate price/sales (P/S) multiple for Lewis?
A)
0.12.
B)
0.18.
C)
0.19.


Profit Margin = EPS / Sales per share = 4.50 / 300 = 0.015 or 1.5%.
Expected growth in dividends and earnings = ROE × (1 − payout ratio) = 0.20 × 0.40 = 0.08 or 8%.
P0/S0 = [profit margin × payout ratio × (1 + g)] / (r − g) = [0.015 × 0.60 × (1.08)] / (0.13 − 0.08) = 0.1944.
作者: invic    时间: 2012-3-31 15:20

An analyst has gathered the following fundamental data:

Firm A

Firm A

Firm B

Firm B

Strategy


High Margin
Low Volume

Low Margin
High Volume

High Margin
Low Volume

Low Margin
High Volume

Payout Ratio

40%

40%

40%

40%

Required Rate of Return

11%

11%

11%

11%

Growth Rate in Dividends

9%

5%

5%

7%

Sales/Book Value of Equity

1.5

4.5

1.0

3

Profit Margin

10%

2%

9%

4%

Book Value

$150

$150

$125

$125

What is the price-to-sales (P/S) multiple for Firm A in the high-margin, low-volume strategy?
A)
2.18.
B)
2.00.
C)
0.13.


The P/S multiple = [Profit Margin × Payout Ratio × (1 + g)] / (r − g) = (0.10 × 0.4 × 1.09) / (0.11 − 0.09) = 2.18.
What is the P/S multiple for Firm B in the low-margin, high-volume strategy?
A)
0.60.
B)
0.43.
C)
2.00.


The P/S multiple = [Profit Margin × Payout Ratio × (1 + g)] / (r − g) = (0.04 × 0.4 × 1.07) / (0.11 − 0.07) = 0.428 or 0.43.
作者: invic    时间: 2012-3-31 15:21

What is the appropriate justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40% if shareholders require a return of 15% on their investment and the expected growth rate in dividends is 5%?
A)
6.30.
B)
4.20.
C)
3.80.


P0/E0 = (0.40 × 1.05) / (0.15 – 0.05) = 4.20
作者: invic    时间: 2012-3-31 15:21

What is the appropriate leading price-to-earnings (P/E) multiple of a stock that has a projected payout ratio of 40% if shareholders require a return of 15% on their investment and the expected growth rate in dividends is 5%?
A)
4.00.
B)
6.30.
C)
13.20.


P0/E0 = 0.40 / (0.15 – 0.05) = 4.00
Note that the leading P/E omits (1 + g) in the numerator, which is present in the formula for the trailing P/E.
作者: invic    时间: 2012-3-31 15:21

An analyst has gathered the following data about Jackson, Inc.: What will be the appropriate price-to-book value (PBV) ratio for Jackson, based on fundamentals?
A)
0.58.
B)
1.73.
C)
1.38.


Return on equity (ROE) = g / (1 − payout ratio) = 0.067 / 0.40 = 0.1675 or 16.75%.
Based on fundamentals:
PBV = (0.1675 − 0.067) / (0.125 − 0.067) = 1.73.
作者: invic    时间: 2012-3-31 15:22

Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year
FirmStrategyRetention RateProfit MarginSales/Book Value of Equity
CVR, Inc.High Margin / Low Volume20%8%1.25
CVR, Inc.Low Margin / High Volume20%2%4.00
Home, Inc.High Margin / Low Volume40%9%2.00
Home, Inc.Low Margin / High Volume40%1%20.0

(Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.)
If CVR, Inc., has a required return for shareholders of 10%, what is its appropriate leading price-to-sales (P/S) multiple if the firm undertakes the high margin/low volume strategy?
A)
1.46.
B)
0.80.
C)
0.20.

n

g = Retention Rate × Profit Margin × Sales/book value of equity = 0.20 × 0.08 × 1.25 = 0.02.
If profit margin is based on the expected earnings next period,
Leading P/S = (profit margin × payout ratio) / (r − g) = (0.08 × 0.80) / (0.10 − 0.02) = 0.80.
作者: invic    时间: 2012-3-31 15:22

Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year
FirmStrategyRetention RateProfit MarginSales/Book Value of Equity
CVR, Inc.High Margin / Low Volume20%8%1.25
CVR, Inc.Low Margin / High Volume20%2%4.00
Home, Inc.High Margin / Low Volume40%9%2.00
Home, Inc.Low Margin / High Volume40%1%20.0

(Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.)
If CVR, Inc., has a required return for shareholders of 10%, what is its appropriate leading price-to-sales (P/S) multiple if the firm undertakes the high margin/low volume strategy?
A)
1.46.
B)
0.80.
C)
0.20.


g = Retention Rate × Profit Margin × Sales/book value of equity = 0.20 × 0.08 × 1.25 = 0.02.
If profit margin is based on the expected earnings next period,
Leading P/S = (profit margin × payout ratio) / (r − g) = (0.08 × 0.80) / (0.10 − 0.02) = 0.80.
作者: invic    时间: 2012-3-31 15:22

An analyst has gathered the following fundamental data:

Firm AFirm BFirm CFirm D
Payout Ratio75%
Required Rate of Return12%12%12%12%
Return on Equity (ROE)20%15%30%14%
Price/Book Value (PBV) Ratio3.000.703.50


What is the PBV ratio for Firm A?
A)
1.25.
B)
2.14.
C)
0.71.


The growth rate in dividends (g) = ROE(1 − payout ratio) = 0.20 × (1 − 0.75) = 0.05 or 5%. The PBV ratio = (ROE − g) / (r − g) = (0.20 − 0.05) / (0.12 − 0.05) = 2.14
作者: invic    时间: 2012-3-31 15:23

A firm has a payout ratio of 40%, a profit margin of 7%, an estimated growth rate of 10%, and its shareholders require a return of 14% 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)
0.70.
B)
0.56.
C)
0.77.


作者: invic    时间: 2012-3-31 15:23

Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year
FirmStrategyRetention RateProfit MarginSales/Book Value (SBV) of Equity
CVR, Inc.High Margin / Low Volume20%8%1.25
CVR, Inc.Low Margin / High Volume20%2%4.00
Home, Inc.High Margin / Low Volume40%9%2.00
Home, Inc.Low Margin / High Volume40%1%20.0


Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.
If Home, Inc., has a required return for shareholders of 11%, what is its appropriate leading price-to-sales (Po / S1) multiple if the firm undertakes the low margin/high volume strategy?
A)
1.00.
B)
0.20.
C)
0.80.


g = Retention Rate × Profit Margin × SBV of equity = 0.40 × 0.01 × 20.0 = 0.08.
If profit margin is based on the expected earnings next period,
P/S = (profit margin × payout ratio) / (r − g) = (0.01 × 0.60) / (0.11 − 0.08) = 0.20.
作者: invic    时间: 2012-3-31 15:24

What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 65% if the shareholders require a return of 10% on their investment and the expected growth rate in dividends is 6%?
A)
17.23.
B)
9.28.
C)
16.25.


P0/E0 = (0.65 × 1.06) / (0.10 – 0.06) = 17.225
作者: invic    时间: 2012-3-31 15:24

A firm’s return on equity (ROE) is 14%, its required rate of return is 10%, and its expected growth rate is 8%. What is the firm’s justified price-to-book value (P/B) based on these fundamentals?
A)
3.00.
B)
2.00.
C)
2.75.


The firm’s justified price-to-book value = (ROE – g) / (r – g) = (0.14 – 0.08) / (0.10 – 0.08) = 3.00
作者: invic    时间: 2012-3-31 15:24

What is the appropriate price-to-sales (P/S) multiple of a stock that has a retention ratio of 45%, a return on equity (ROE) of 14%, an earnings per share (EPS) of $5.25, sales per share of $245.54, an expected growth rate in dividends and earnings of 6.5%, and shareholders require a return of 11% on their investment?
A)
0.158.
B)
0.227.
C)
0.278.


Recall that profit margin is measured as E0 / S0. In this example, the profit margin is (5.25 / 245.54) = 0.0214. Thus:
P0 / S0 = [(E0 / S0)(1 − b)(1 + g)] / (r − g) = [0.0214(0.55)(1.065)] / (0.11 − 0.065) = 0.278
作者: invic    时间: 2012-3-31 15:25

A firm’s return on equity (ROE) is 15%, its required rate of return is 12%, and its expected growth rate is 7%. What is the firm’s justified price to book value (P/B) based on these fundamentals?
A)
1.60.
B)
1.71.
C)
0.63.


P0/B0 = (ROE – g) / (r – g) = (0.15 – 0.07) / (0.12 – 0.07) = 1.60
作者: invic    时间: 2012-3-31 15:25

Industrial Light had earnings per share (EPS) of $5.00 past year, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the trailing price-to-earnings (P/E) ratio?
A)
7.50.
B)
3.75.
C)
7.14.


P/E =
1 − b = 1 − (2.50/5.00) = 0.50P5 / E5 = (0.50 × 1.05) / (0.12 − 0.05) = 7.50
作者: invic    时间: 2012-3-31 15:26

An analyst is valuing a company with a dividend payout ratio of 0.55, a beta of 0.92, and an expected earnings growth rate of 0.07. A regression on comparable companies produces the following equation:
Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta)What is the predicted P/E using the above regression?
A)
11.43.
B)
10.14.
C)
7.65.


Predicted P/E = 7.65 + (3.75 × 0.55) + (15.35 × 0.07) − (0.70 × 0.92) = 10.14
作者: invic    时间: 2012-3-31 15:27

An analyst is valuing a company with a dividend payout ratio of 0.35, a beta of 1.45, and an expected earnings growth rate of 0.08. A regression on comparable companies produces the following equation:
Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta)What is the predicted P/E using the above regression?
A)
7.65.
B)
11.21.
C)
9.18.


Predicted P/E = 7.65 + (3.75 × 0.35) + (15.35 × 0.08) − (0.70 × 1.45) = 9.1755
作者: invic    时间: 2012-3-31 15:27

An analyst is valuing a company with a dividend payout ratio of 0.65, a beta of 0.72, and an expected earnings growth rate of 0.05. A regression on comparable companies produces the following equation:
Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta)What is the predicted P/E using the above regression?
A)
10.35.
B)
7.65.
C)
11.39.


Predicted P/E = 7.65 + (3.75 × 0.65) + (15.35 × 0.05) − (0.70 × 0.72) = 10.35
作者: invic    时间: 2012-3-31 15:28

Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 38 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:
A)
viewed as a properly valued stock.
B)
bought as an undervalued stock.
C)
sold or sold short as an overvalued stock.


The price per dollar of earnings is considerably higher than that for the median of the peer group, which implies that it may well be overvalued.
作者: invic    时间: 2012-3-31 15:28

Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:
A)
sold or sold short as an overvalued stock.
B)
bought as an undervalued stock.
C)
viewed as a properly valued stock.


The price per dollar of earnings is the same as that for the median of the peer group, which implies that it is likely properly valued.
作者: invic    时间: 2012-3-31 15:28

Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 38. Based on the method of comparables, an analyst would most likely conclude that PTI should be:
A)
sold as an overvalued stock.
B)
sold short as an overvalued stock.
C)
bought as an undervalued stock.


The price per dollar of earnings is considerably lower than that for the median of the peer group, which implies that it may well be undervalued.
作者: invic    时间: 2012-3-31 15:28

Enhanced Systems, Inc., has a price to book value (P/B) of five while the median P/B of a peer group of companies within the industry is five. Based on the method of comparables, an analyst would most likely conclude that ESI should be:
A)
bought as an undervalued stock.
B)
viewed as a properly valued stock.
C)
sold or sold short as an overvalued stock.


The price per dollar of book value is the same as that for the median of the peer group, which implies that it is likely properly valued.
作者: invic    时间: 2012-3-31 15:29

Enhanced Systems, Inc., (ESI) has a leading price to sales (P/S) of 0.18 while the median leading P/S of a peer group of companies within the industry is 0.10. Based on the method of comparables, an analyst would most likely conclude that ESI should be:
A)
bought on margin as an undervalued stock.
B)
sold or sold short as an overvalued stock.
C)
bought as an undervalued stock.


The price per dollar of sales is considerably higher than that for the median of the peer group, which implies that it may well be overvalued.
作者: invic    时间: 2012-3-31 15:29

Enhanced Systems, Inc., (ESI) has a leading price to book value (P/B) of four while the median P/B of a peer group of companies within the industry is six. Based on the method of comparables, an analyst would most likely conclude that ESI should be:
A)
viewed as a properly valued stock.
B)
bought as an undervalued stock.
C)
sold as an overvalued stock.


The price per dollar of book value is considerably lower than that for the median of the peer group, which implies that it may well be undervalued
作者: invic    时间: 2012-3-31 15:30

Carol Jenkins, CFA, works as a stock analyst for Cape Cod Partners, a money-management firm that handles private accounts for high net worth clients. Jenkins’ assignment is to find attractively valued stocks for client portfolios.
Jenkins believes that recent weakness in the technology sector presents an attractive opportunity. She is looking at Massive Tech, the market leader in chipsets for laptop computers, and Mouse & Associates, a tiny software developer specializing in data-storage programs. Jenkins is considering the companies’ relative values in a number of ways. Statistics for Massive and Mouse are provided below:
Massive TechMouse & Associates
Stock price$65$12
Trailing earnings$4,300$3.15
Market capitalization$130,000$84
Assets$16,250$7.0
Equity$12,000$5.5
Operating margin49%54%
Net margin12%22%
Depreciation$3,500$6
Amortization$5,675$1.5
Fixed investment plus borrowing$4,200$0.3
Dividends$3$0.02
Shares outstanding2,0007

* All figures except stock price, dividends, and percentages are in millions.

In most cases, Jenkins values her stocks relative to a basket of stocks in the same industry in order to avoid significant fundamental differences between companies of different types. However, her picks made based on price/earnings ratios are not doing well against the market. She fears the stocks she selects are not as cheap as she originally thought, relative to her benchmark.
Jenkins also wants to improve Cape Cod’s selection of software stocks. To widen the field beyond the companies she currently follows, Jenkins wants to include Canadian software stocks in Cape Cod’s research universe. Differences in accounting methodologies are not a concern, but Jenkins is still concerned about the difficulty of valuing the different stocks.
Jenkins has assembled the following data about Canadian software companies:Which of the following explanations is least likely to explain why Jenkins’ stock picks underperform?
A)
She is using the mean rather than the median valuation as a benchmark.
B)
Many stocks in the benchmark group are mispriced.
C)
Large stocks have an outsized effect on the benchmark data.


Capitalization weights are not an issue unless the benchmark is a cap-weighted index. Jenkins is using a basket of stocks in the same industry, which can be assumed to be a simple arithmetic average. Average valuations reflect outliers; medians do not. P/Es can get very high, but can never fall below zero. As such, the outliers are going to trend high, and the median is likely to be considerably lower than the mean. A stock that looks cheap relative to the mean may look expensive relative to the median. Stocks of different sizes often have different average or median valuations. Mispricing of stocks in the benchmark is always a risk. (Study Session 12, LOS 44.k)
If she wants to compare Canadian software companies to U.S. software companies, it would be most appropriate for Jenkins to value the companies using the:
A)
price/sales ratio.
B)
enterprise value/EBITDA ratio.
C)
price/book ratio.


Accounting issues are not relevant to this discussion. As such, we must consider the other characteristics of the market to choose the best method. The P/E ratio is limited in value because many of the companies do not make money. The P/S ratio doesn’t work well when the companies have different cost structures, and the measure does not reflect differences in profit margins. EBITDA is less likely to be negative than earnings, but it will fall prey to differences in cost structure just as the P/E and P/S ratios will. Like EBITDA, book value is often positive even when profits are negative. The price/book ratio is best for valuing companies with small amounts of fixed assets, like software makers. In addition, the fact that most of the companies are small eliminates one of the P/B ratio’s weaknesses that it can be misleading when compared firms have significantly different asset sizes. (Study Session 12, LOS 44.k)
Which valuation ratio is least appropriate for comparing Massive and Mouse?
A)
Price/book because Massive is larger than Mouse.
B)
Enterprise value/EBITDA because Massive and Mouse have very different debt levels.
C)
Price/cash flow because cash flows for small companies can be extremely volatile.


The P/B ratio’s can be misleading when used to compare companies with vastly different asset bases. A large semiconductor company is likely to have lots of fixed assets, while a tiny software company may have very few assets. The P/CF ratio tends to be more stable than the P/E ratio. The P/E ratio is useless for considering companies that lose money, but that does not mean the measure has no value when earnings are positive. The EV/EBITDA ratio is effective at comparing stocks with different degrees of financial leverage. (Study Session 12, LOS 44.k)
Mouse & Associates is cheaper than Massive Tech as measured by:
A)
the price/sales ratio and the dividend yield.
B)
the price/sales ratio and the price/earnings ratio.
C)
the earnings yield but not the price/book.

To calculate the P/E, divide the market capitalization by the earnings. Lower is cheaper.
To calculate the P/B, divide the market capitalization by the equity. Lower is cheaper.
To calculate the P/S, determine sales by dividing the earnings by the net margin. Then divide the market capitalization by the sales. Lower is cheaper.
To calculate the earnings yield, divide the earnings by the market capitalization. Higher is cheaper.
To calculate the dividend yield, divide the dividends by the price. Higher is cheaper.


Massive Tech

Mouse & Associates

P/E

30.23

26.67

P/B

10.83

15.27

P/S

3.63

5.87

Earnings yield

3.31%

3.75%

Dividend yield

4.62%

0.17%


(Study Session 12, LOS 44.d)

The price/cash flow ratio of Massive Tech, where cash flow is defined as earnings plus noncash charges, is closest to:
A)
9.65.
B)
7.89.
C)
16.67.


Cash flow = net income plus depreciation plus amortization = ($4,300 + 3,500 + 5,675) = $13,475 million.
P/CF = market capitalization/cash flow = ($130,000/13,475) = 9.65. (Study Session 12, LOS 44.d)
If Jenkins wants to compare foreign stocks to U.S. stocks and is concerned about differences in accounting, she should start with the:
A)
price/book ratio.
B)
dividend yield.
C)
price/FCFE ratio.


Of all the price ratios, the price/free cash flow to equity ratio is the least affected by international accounting differences. However, the dividend yield is not affected by such accounting differences at all, and represents a good starting point. Residual-income models and price/book ratios are very sensitive to accounting issues. (Study Session 12, LOS 44.p)
作者: invic    时间: 2012-3-31 15:31

For which of the following firms is the Price/Earnings to Growth (PEG) ratio most appropriate for identifying undervalued or overvalued equities?Firm A: Expected dividend growth = 6%; Cost of equity = 12%; price-to-earnings (P/E) = 12.
Firm B: Expected dividend growth = −6%; Cost of equity = 12%; price-to-earnings (P/E) = 12.
Firm C: Expected dividend growth = 1%; Cost of equity = 12%; price-to-earnings (P/E) = 12.
A)
Firm C.
B)
Firm B.
C)
Firm A.


The formula for the PEG ratio is: PEG = (P/E) / g. It measures the tradeoff between P/E and expected dividend growth (g). For traditional growth firms, PEG ratios fall between 1 and 2. The general rule is that PEG ratios above 2 are indicative of overvalued firms (expensive), and PEG ratios below 1 are indicative of firms that are undervalued (cheap).

Firm A:
PEG = 2, indicating a stock that is appropriately priced.

Firm B:

The PEG ratio of firms with negative expected dividend growth is negative, which is meaningless. For Firm B, PEG = -2.


Firm C:

Firms with very low expected dividend growth are likely to have PEG ratios that unrealistically indicate overvalued stocks. For Firm C, PEG = 12.

作者: invic    时间: 2012-3-31 15:32

Consider the statement: "Unlike many valuation metrics that incorporate dividend discounting, the PEG ratio may be used to value firms with zero expected dividend growth prospects." Is this statement correct?
A)
Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio.
B)
Yes, because the computation of the PEG ratio does not use the rate of expected dividend growth.
C)
No, because the PEG ratio is undefined for zero-growth companies.


The PEG ratio measures the tradeoff between P/E and expected earnings growth (g). The formula for the PEG ratio is: PEG = (P/E) / g. Firms with zero expected earnings growth will have an infinite (or undefined) PEG ratio due to division by zero.
作者: invic    时间: 2012-3-31 15:32

Two security analysts, Ramon Long and Sri Beujeau, disagree about certain aspects of the PEG ratio. Long argues that: "unlike typical valuation metrics that incorporate dividend discounting, the PEG ratio is unique because it generates meaningful results for firms with negative expected earnings-growth." Is Long correct?
A)
Yes, because the expected earnings-growth rate is cancelled out in the computation of the PEG ratio.
B)
No, because the PEG ratio generates meaningless results for negative earnings-growth companies.
C)
Yes, because the computation of the PEG ratio does not use the rate of expected earnings growth.


The PEG ratio is: PEG = (P/E) / earnings growth. As such, firms with negative expected earnings growth will have a negative PEG ratio, which is meaningless.
作者: invic    时间: 2012-3-31 15:32

The definition of a PEG ratio is price to earnings (P/E):
A)
divided by the expected earnings growth rate.
B)
divided by the average growth rate of the peer group.
C)
divided by average historical earnings growth rate.


The PEG ratio is P/E divided by the expected earnings growth rate.
作者: invic    时间: 2012-3-31 15:33

Which of the following statements regarding the P/E to growth (PEG) valuation approach is least accurate? The P/E to growth (PEG) valuation approach assumes that:
A)
there are no risk differences among stocks.
B)
there is a linear relationship between price to earnings (P/E) and growth.
C)
stocks with higher PEGs are more attractive than stocks with lower PEGs.


The PEG valuation approach implicitly assumes there is a linear relationship between price to earnings (P/E) and growth, even though there is not a "real world" linear relationship. The analyst must be cautious when using the PEG ratio for valuation or comparison purposes especially if the growth rate is very small or very large. If earnings or the growth rate is negative the PEG ratio is meaningless. The PEG ratio does not adjust for varying levels of risk among stocks and views stocks with lower PEG ratios to be more attractive than stocks with higher PEG ratios.
作者: invic    时间: 2012-3-31 15:33

The relative valuation model known as the PEG ratio is equal to:
A)
earnings per share growth rate / price-to-earnings.
B)
P/E × earnings.
C)
price-to-earnings (P/E) / earnings per share (EPS) growth rate.


The PEG ratio is equal to the price-to-earnings ratio divided by the EPS growth rate.
作者: invic    时间: 2012-3-31 15:34

Good Sports, Inc., (GSI) has a leading price-to-earnings (P/E) ratio of 12.75 and a 5-year consensus growth rate forecast of 8.5%. What is the firm’s P/E to growth (PEG) ratio?
A)
150.00.
B)
1.50.
C)
0.67.


The firm’s PEG is 12.75 / 8.50 = 1.50.
作者: invic    时间: 2012-3-31 15:34

At a regional security analysts conference, Sandeep Singh made the following comment: "A PEG ratio is a very useful valuation metric because it generates meaningful results for all equities, regardless of the rate of dividend growth." Is Singh correct?
A)
Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio.
B)
Yes, because the computation of the PEG ratio does include the rate of expected dividend growth.
C)
No, because the PEG ratio generates highly questionable results for low-growth companies.


The PEG ratio measures the tradeoff between P/E and expected earnings growth (g). The formula for the PEG ratio is: PEG = (P/E) / g. PEG ratios generate questionable results for low-growth companies. Also, the PEG ratio is undefined for companies with zero expected growth (division by zero) or meaningless for companies with negative expected earnings growth.
作者: invic    时间: 2012-3-31 15:35

A common price to earnings (P/E) based method for estimating terminal value in multi-stage models is the:
A)
P/E to growth (PEG) approach.
B)
dividend yield approach.
C)
fundamentals approach.


It is common to restate the Gordon growth model price as a multiple of expected future book value per share or earnings per share (EPS).
作者: invic    时间: 2012-3-31 15:35

Precision Tools is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.00, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?
A)
6.00.
B)
7.14.
C)
9.00.


P5/E5 = (0.40 × 1.05) / (0.12 – 0.05) = 6.00
作者: invic    时间: 2012-3-31 15:36

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is best suited as a measure of:
A)
equity value.
B)
total company value.
C)
debt capacity.


EBITDA is a pre-tax, pre-interest measure, which represents a flow to both equity and debt. Thus, it is better suited as an indicator of total company value than just equity value.
作者: invic    时间: 2012-3-31 15:36

If cash flow from operations (CFO) embeds financing-related flows, it should be adjusted by:
A)
subtracting (net interest outflow) × (1 - tax rate).
B)
adding (net interest outflow) × (1 - tax rate).
C)
subtracting capital expenditures.


Cash flow from operations CFO should be adjusted to CFO + (net cash interest outflow) × (1 – tax rate), if CFO embeds financing-related flows.
作者: invic    时间: 2012-3-31 15:36

Which of the following measures of cash flow is most closely linked with valuation theory?
A)
Free cash flow to equity (FCFE).
B)
Cash flow from operations (CFO).
C)
Earnings before interest, taxes, depreciation, and amortization (EBITDA).


FCFE is most strongly linked to valuation theory. Both remaining proxies are in need of significant adjustment to accurately measure cash flow in valuation.
作者: luckygiftvn    时间: 2012-3-31 15:39

An analyst gathered the following data for TRK Construction [all amounts in Swiss francs (Sf)]:
Recent share priceSf 30.00
Shares outstandingSf 40 million
Market value of debtSf 120 million
Cash and marketable securitiesSf 75 million
InvestmentsSf 200 million
Net incomeSf 160 million
Interest expenseSf 9 million
Depreciation and amortizationSf 12 million
TaxesSf 48 million

The EV/EBITDA multiple for TRK Construction is closest to:
A)
3.47x.
B)
4.56x.
C)
5.21x.


EBITDA = (net income + interest + taxes + depreciation / amortization)EV = (market value of common stock + market value of debt – cash and investments)
EBITDA = 160 + 9 + 12 + 48 = Sf 229 million
EV = (30 × 40) + 120 – 75 – 200 = Sf 1045 million
EV / EBITDA = 4.56
作者: luckygiftvn    时间: 2012-3-31 15:39

An analyst gathered the following data for TRK Construction [all amounts in Swiss francs (Sf)]:
Recent share priceSf 22.00
Shares outstanding40 million
Market value of debtSf 140 million
Cash and marketable securitiesSf 55 million
InvestmentsSf 300 million
Net incomeSf 140 million
Interest expenseSf 7 million
Depreciation and amortizationSf 10 million
TaxesSf 56 million
The EV/EBITDA ratio for TRK Construction is closest to:
A)
3.12x.
B)
2.52x.
C)
3.49x.


EBITDA = (net income + interest + taxes + depreciation / amortization)
EV = (market value of common stock + market value of debt – cash and investments)
EBITDA = 140 + 7 + 10 + 56 = Sf 213 million
EV = (22 × 40) + 140 – 55 – 300 = Sf 665 million
EV / EBITDA = 3.12
作者: luckygiftvn    时间: 2012-3-31 15:40

Which of the following are advantages of using EV/EBITDA?
A)
If working capital is growing, EBITDA will be larger than CFO.
B)
EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization.
C)
EV/EBITDA ignores how different revenue recognition policies affect CFO.


EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization. The other statements are disadvantages to using EV/EBITDA.
作者: luckygiftvn    时间: 2012-3-31 15:40

Which of the following is a disadvantage to using EV/EBITDA?
A)
Since FCFF captures the amount of capital expenditures, it is more strongly linked with valuation theory than EBITDA.
B)
EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization.
C)
EBITDA is usually positive even when EPS is not.


Since FCFF captures the amount of capital expenditures, it is more strongly linked with valuation theory than EBITDA. The other statements are advantages.



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