Kingpin804

Assume the following information for a stock:

Beta coefficient	= 1.50
Risk-free rate	= 6%
Expected rate of return on market	= 14%
Dividend payout ratio	= 30%
Expected dividend growth rate	= 11%

The estimated earnings multiplier (P/E ratio) is closest to:

A) 4.29.

B) 3.33.

C) 10.00.

---

P/E = D/E1 / (k − g)
D/E1 = Dividend payout ratio = 0.3
g = 0.11
k = 6 + (1.5)(14 − 6) = 18%
P/E = 0.3 / (0.18 − 0.11) = 0.3 / 0.07 = 4.29

Kingpin804

An analyst gathered the following data for the Parker Corp. for the year ended December 31, 2005:

• EPS2005 = $1.75
• Dividends2005 = $1.40
• Beta Parker = 1.17
• Long-term bond rate = 6.75%
• Rate of return S&P 500 = 12.00%

The firm is expected to continue their dividend policy in future. If the long-term growth rate in earnings and dividends is expected to be 6%, the forward P/E ratio for Parker Corp. will be:

A) 21.54.

B) 11.61.

C) 12.31.

---

The required rate of return on equity for Parker will be 12.89% = 6.75% + 1.17(12.00% − 6.75%) and the firm pays 80% (1.40 / 1.75) of its earnings as dividends.
Forward P/E ratio = 0.80 / (0.1289 - 0.0600) = 11.61
Where r = required rate of return on equity, gn = growth rate in dividends (forever).

Kingpin804

An analyst gathered the following data for the Parker Corp. for the year ended December 31, 2005:

• EPS2005 = $1.75
• Dividends2005 = $1.40
• Beta Parker = 1.17
• Long-term bond rate = 6.75%
• Rate of return S&P500 = 12.00%

The firm has changed its dividend policy and now plans to pay out 60% of its earnings as dividends in the future. If the long-term growth rate in earnings and dividends is expected to be 5%, the appropriate price to earnings (P/E) ratio for Parker will be:

A) 9.14.

B) 7.98.

C) 7.60.

---

Required rate of return on equity will be 12.89% = 6.75% + 1.17(12.00% - 6.75).
P/E Ratio = 0.60 / (0.1289 - 0.0500) = 7.60.

Kingpin804

All else equal, a firm will have a higher Price-to-Earnings (P/E) multiple if:

A) the stock’s beta is lower.

B) return on equity (ROE) is lower.

C) retention ratio is higher.

---

To increase P/E ratio, lower the retention ratio, lower k and or increase g. A lower beta would lead to a lower stock risk premium and a lower k.

Kingpin804

Use the following data to analyze a stock's price earnings ratio (P/E ratio):

• The stock's beta is 1.2.
• The dividend payout ratio is 60%.
• The stock's expected growth rate is 7%.
• The risk free rate is 6% and the expected rate of return on the market is 13%.

Using the dividend discount model, the expected P/E ratio of the stock is closest to:

A) 5.4.

B) 8.1.

C) 10.0.

---

k = ER = Rf + Beta(RM − Rf) = 0.06 + (1.2)(0.13 − 0.06) = 0.144
Dividend payout ratio = 0.60
P/E = div payout / (k − g) = 0.6 / (0.144 − 0.07) = 8.1

Kingpin804

A stock has a required rate of return of 15%, a constant growth rate of 10%, and a dividend payout ratio of 45%. The stock’s price-earnings ratio should be:

A) 9.0 times.

B) 4.5 times.

C) 3.0 times.

---

P/E = D/E1/ (k - g)
D/E1 = Dividend Payout Ratio = 0.45
k = 0.15
g = 0.10
P/E = 0.45 / (0.15 - 0.10)
= 0.45 / 0.05 = 9

mouse123

The current price of XYZ, Inc., is $40 per share with 1,000 shares of equity outstanding. Sales are $4,000 and the book value of the firm is $10,000. What is the price/sales ratio of XYZ, Inc.?

A) 10.000.

B) 0.010.

C) 4.000.

---

The price/sales ratio is (price per share)/(sales per share) = (40)/(4,000/1,000) = 10.0. Alternatively, the price/sales ratio may be thought of as the market value of the company divided by its sales, or (40 × 1,000)/4,000, or 10.0 again.

mouse123

Given the following information, compute price/book value.

• Book value of assets = $550,000
• Total sales = $200,000
• Net income = $20,000
• Dividend payout ratio = 30%
• Operating cash flow = $40,000
• Price per share = $100
• Shares outstanding = 1000
• Book value of liabilities = $500,000

A) 5.5X.

B) 2.0X.

C) 2.5X.

---

Book value of equity = $550,000 - $500,000 = $50,000
Market value of equity = ($100)(1000) = $100,000
Price/Book = $100,000/$50,000 = 2.0X

mouse123

General, Inc., has net income of $650,000 and one million shares outstanding. The profit margin is 6 percent and General, Inc., is selling for $30.00. The price/sales ratio is equal to:

A) 0.65.

B) 10.83.

C) 2.77.

---

6% profit margin = $650,000/x; x (sales) = $10,833,333.
Sales per share = $10.83 M/1,000,000 = $10.83 per share.
P/Sales = $30.00/$10.83 = 2.77.

mouse123

An analyst studying Albion Industries determines that the average EV/EBITDA ratio for Albion’s industry is 10. The analyst obtains the following information from Albion’s financial statements:

EBITDA = £11,000,000
Market value of debt = £30,000,000
Cash = £1,000,000

Based on the industry’s average enterprise value multiple, what is the equity value of Albion Industries?

A) £110,000,000.

B) £80,000,000.

C) £81,000,000.

---

Enterprise value = Average EV/EBITDA × company EBITDA = 10 × £11,000,000 = £110,000,000
Enterprise value = Equity value + debt − cash
Equity value = Enterprise value − debt + cash = £110,000,000 − £30,000,000 + £1,000,000 = £81,000,000