Reading 44: Market-Based Valuation: Price and Enterprise Val 2011, interpret, center

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

LOS i: Calculate and interpret 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.

 

 

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) 1.71.

B) 1.60.

C) 0.63.

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P₀/B₀ = (ROE – g) / (r – g) = (0.15 – 0.07) / (0.12 – 0.07) = 1.60

[此贴子已经被作者于2011-3-21 11:33:54编辑过]

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The Lewis Corp. had revenue per share of $300 in 2001, earnings per share of $4.50, and paid out 60% of its earnings as dividends. If the return on equity (ROE) and required rate of return of Lewis are 20% and 13% respectively, what is the appropriate price/sales (P/S) multiple for Lewis?

A) 0.12.

B) 0.18.

C) 0.19.

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Profit Margin = EPS / Sales per share = 4.50 / 300 = 0.015 or 1.5%.

Expected growth in dividends and earnings = ROE × (1 ? payout ratio) = 0.20 × 0.40 = 0.08 or 8%.

P₀/S₀ = [profit margin × payout ratio × (1 + g)] / (r ? g) = [0.015 × 0.60 × (1.08)] / (0.13 ? 0.08) = 0.1944.

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The following data was available for Morris, Inc., for the year ending December 31, 2001:

• Sales per share = $150.
• Earnings per share = $1.75.
• Return on Equity (ROE) = 16%.
• Required rate of return = 12%.

If the expected growth rate in dividends and earning is 4%, what will the appropriate price-to-sales (P/S) multiple be for Morris?

A) 0.037.

B) 0.114.

C) 0.109.

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Profit Margin = EPS / Sales per share = 1.75 / 150 = 0.01167 or 1.167%.

Payout ratio = 1 ? (g / ROE) = 1 ? (0.04 / 0.16) = 0.75 or 75%.

P₀ / S₀ = [profit margin × payout ratio × (1 + g)] / (r ? g) = [0.01167 × 0.75 × 1.04] / (0.12 ? 0.04) = 0.11375.

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An analyst has gathered the following data about the Garber Company:

• Payout Ratio = 60%.
• Expected Return on Equity = 16.75%.
• Required rate of return = 12.5%.

What will be the appropriate price-to-book value (PBV) ratio for the Garber Company based on return differential?

A) 0.58.

B) 1.73.

C) 1.38.

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The estimated growth rate is 6.7% [0.1675 × (1 ? 0.60)] and PBV ratio based on rate differential will be:
P₀ / BV₀ = (ROE₁ ? g) / (r ? g) = (0.1675 ? 0.067) / (0.125 ? 0.067) = 1.73.

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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) 9.28.

B) 16.25.

C) 17.23.

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P₀/E₀ = (0.65 × 1.06) / (0.10 – 0.06) = 17.225

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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) 0.77.

C) 0.56.

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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) 6.30.

B) 4.00.

C) 13.20.

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P₀/E₀ = 0.40 / (0.15 – 0.05) = 4.00

Note that the leading P/E omits (1 + g) in the numerator, which is present in the formula for the trailing P/E.

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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.

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P₀/E₀ = (0.40 × 1.05) / (0.15 – 0.05) = 4.20

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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.

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Based on fundamentals:
P/BV = (0.14 ? 0.042) / (0.11 ? 0.042) = 1.44.

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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) 4.00.

B) 6.36.

C) 4.24.

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P₀/E₁ = 0.40 / (0.16 – 0.06) = 4.00