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Reading 44: Market-Based Valuation: Price and Enterprise Val

Session 12: Equity Investments: Valuation Models
Reading 44: Market-Based Valuation: Price and Enterprise Value Multiples

LOS d: Calculate and interpret alternative price multiples and dividend yield.

 

 

The trailing price-to-earnings (P/E) ratio is defined as:

A)
price to most recent earnings.
B)
price to next period's expected earnings.
C)
the average P/E over the last five years.


 

The trailing P/E ratio is price to most recent realized earnings.

[此贴子已经被作者于2011-3-21 11:31:58编辑过]

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)
Yes, Xanedu's justified leading P/E ratio will increase by approximately 0.5%.
B)
No, Xanedu's justified leading P/E ratio will decrease by approximately 7.8%.
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.

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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)
Yes, ZEI's P/E ratio will increase by approximately 0.5%.
C)
No, ZEI's P/E ratio will increase by approximately 14.32%.


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.

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