Question 86 

Martin Johnson, CFA, is a stock analyst at High Mountain Investments. He uses several methods and a variety of ratios to determine a value for different equity securities. Four ratios that he commonly uses are the Price to Book Value (P/BV) Ratio, the Price to Earnings (P/E) Ratio, the Price to Sales (P/S) Ratio and the Price to Cash Flow (P/CF) Ratio. Along with the usefulness of these ratios, Johnson recognizes that there are a number of drawbacks associated with using each of them. The two drawbacks that are of most concern to his current analysis are:

Drawback #1: Failure to capture differences in cost structures across companies. 

Drawback #2: Inflation and technological change may make this ratio difficult to compare across firms. 

Which of the following ratios is most susceptible to the above drawbacks, respectively?

 Drawback #1       Drawback #2

A) P/S Ratio         P/BV Ratio

B) P/CF Ratio        P/E Ratio

C) P/E Ratio         P/BV Ratio

D) P/S Ratio         P/CF Ratio

Question 87 

Marc Juneau, CFA, an equity analyst, is valuing Avalon Games, Inc. He expects the company to grow at 30% for three years. Beginning in year 4, the growth rate is expected to reach 7% and stabilize. The required return for this type of company is estimated at 13%. The dividend in year 1 will be $3.00. The value Juneau should calculate for the stock of Avalon Games is closest to: 

A) $65.

B) $72.

C) $87.

D) $45.

Question 88 

Assuming that a company has an actual return on equity less than its shareholders' required return on equity and that all other variables remain unchanged, which of the following would increase the firm's price/earnings ratio? 

A) The yield on T-Bills increases.

B) Investors become more risk averse.

C) The dividend payout ratio decreases.

D) The level of inflation is expected to decline.

Question 89 

Porter’s five factors for determining the intensity of competition within an industry are least likely to include: 

A) threat of new entrants.

B) regulatory environment.

C) potential substitutes.

D) bargaining power of buyers.

Question 90 

The top-down approach to security valuation begins with the analysis of: 

A) an industry.

B) the economy.

C) company fundamentals.

D) portfolio risk and return.

答案和详解如下：

Answer 86 
The correct answer was A) 
P/S Ratio      P/BV Ratio
P/S ratios do not capture differences in cost structures across companies because they only use the top line of the income statement, sales, in their calculation. Inflation and technological change may cause the book and market value of assets to differ significantly. This makes book value difficult to interpret as an accurate measure of an investor’s value and would reduce the usefulness of P/BV ratios when comparing different companies. 
This question tested from Session 14, Reading 61, LOS a, (Part 2)
 
Answer 87 
The correct answer was B) $72. 
The high “supernormal” growth in the first three years and the decrease in growth thereafter signals that we should use a combination of the multi-period and finite dividend growth models (DDM) to value the stock of Avalon Games.
Step 1: Determine the Dividend stream through year 4
D1 = $3.00 (given) 
D2 = D1 × (1 + g) = $3.00 × (1.30) = $3.900 
D3 = D2 × (1 + g) = $3.90 × (1.30) = $5.070 
D4 = D1 × (1 + g) = $5.07 × (1.07) = $5.425 
Step 2: Calculate the value of the stock at the end of year 3 (using D4)
P3 = D4 / (ke – g) = $5.425 / (0.13 – 0.07) = $90.42 
Step 3: Calculate the PV of each cash flow stream at ke = 13%, and sum the cash flows. Note: We suggest you clear the financial calculator memory registers before calculating the value. 
  Calculator Keystrokes Result
CF Stream Formula FV1 =  N= I/Y = PV=
D1 3.00 / (1.13)1 -3.00 1 13 2.65
D2 3.90 / (1.13)2 -3.90 2 13 3.05
D3 5.07 / (1.13)3 -5.07 3 13 3.51
P3 90.42 / (1.13)3 -90.42 3 13 62.67
Total 71.88

Note: 1Future values are entered in a financial calculator as negatives to ensure that the PV result is positive. It does not mean that the cash flows are negative.
Also, your calculations may differ slightly due to rounding. Remember that the question asks you to select the closest answer.
This question tested from Session 14, Reading 60, LOS e
 
Answer 88 
The correct answer was D) The level of inflation is expected to decline. 
Decrease in the expected inflation rate. The expected inflation rate is a component of ke (through the nominal risk free rate). ke can be represented by the following: nominal risk free rate + stock risk premium, where nominal risk free rate = [(1 + real risk free rate) * (1 + expected inflation rate)] – 1. 
If the rate of inflation decreases, the nominal risk free rate will decrease. 
ke will decrease. 
The spread between ke and g, or the P/E denominator, will decrease. 
P/E ratio will increase. 
(An increase in the yield on T-Bills, or nominal risk-free rate, would have the opposite effect. In addition, an increase in risk aversion would increase ke, which would widen the spread in the denominator and decrease the P/E ratio.)
Decrease in dividend payout/increase in earnings retention. In this case, a decrease in the dividend payout (which is the same as an increase in earnings retention) will likely decrease the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of ke and ROE. If the company is earning a Iower rate on new projects than the rate required by the market (ROE < ke), investors will likely prefer that the company pay out earnings rather than investing in lower-yield projects. Since an decrease in the dividend payout would increase earnings retention, the P/E ratio would fall, as investors will value the company lower if it retains a higher percentage of earnings. 
This question tested from Session 14, Reading 60, LOS c

Answer 89 

The correct answer was B) regulatory environment. 

Porter’s five factors are: rivalry among the existing competitors, threat of new entrants, threat of substitute products, bargaining power of buyers, and bargaining power of suppliers. 

This question tested from Session 14, Reading 58, LOS e, (Part 2)

Answer 90 

The correct answer was B) the economy. 

The top-down, three-step approach to security valuation starts with an economic forecast. 

This question tested from Session 14, Reading 56, LOS a

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