LOS h: Calculate a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology.

Q1. 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)   9.18.

B)   7.65.

C)   11.21.

Q2. 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)   7.65.

C)   10.14.

Q3. 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.

LOS h: Calculate a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology. fficeffice" />

Q1. 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)   9.18.

B)   7.65.

C)   11.21.

Correct answer is A)

Predicted P/E = 7.65 + (3.75 × 0.35) + (15.35 × 0.08) ? (0.70 × 1.45) = 9.1755

Q2. 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)   7.65.

C)   10.14.

Correct answer is C)       

Predicted P/E = 7.65 + (3.75 × 0.55) + (15.35 × 0.07) ? (0.70 × 0.92) = 10.14

Q3. 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.

Correct answer is A)

Predicted P/E = 7.65 + (3.75 × 0.65) + (15.35 × 0.05) ? (0.70 × 0.72) = 10.35