LOS g: Calculate the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals.
Q1. 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.
Q2. 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) 0.278.
B) 0.158.
C) 0.227.
Q3. 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) 2.00.
B) 2.75.
C) 3.00.
Q4. 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.
Q5. 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) 4.20.
B) 6.30.
C) 3.80.
Q6. The Farmer Co. has a payout ratio of 70% and a return on equity (ROE) of 14%. What will be the appropriate price-to-book value (PBV) based on fundamentals if the expected growth rate in dividends is 4.2% and the required rate of return is 11%?
A) 1.44.
B) 0.64.
C) 1.50.
Q7. 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) 6.36.
B) 4.00.
C) 4.24.
Q8. 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.
Q9. 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) 0.80.
C) 0.20.
Q10. 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.
LOS g: Calculate the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals.
Q1. 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.
Q2. 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) 0.278.
B) 0.158.
C) 0.227.
Q3. 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) 2.00.
B) 2.75.
C) 3.00.
Q4. 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.
Q5. 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) 4.20.
B) 6.30.
C) 3.80.
Q6. The Farmer Co. has a payout ratio of 70% and a return on equity (ROE) of 14%. What will be the appropriate price-to-book value (PBV) based on fundamentals if the expected growth rate in dividends is 4.2% and the required rate of return is 11%?
A) 1.44.
B) 0.64.
C) 1.50.
Q7. 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) 6.36.
B) 4.00.
C) 4.24.
Q8. 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.
Q9. 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) 0.80.
C) 0.20.
Q10. 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.
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