Reading 58: Company Analysis and Stock Valuation LOSb习题精选 2010, investment, following, regarding

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LOS b: Describe and estimate the expected earnings per share (EPS) and earnings multiplier for a company and use the multiple to make an investment decision regarding the company.

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) 3.33.

B) 4.29.

C) 10.00

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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

 

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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) 4.5 times.

B) 9.0 times.

C) 3.0 times.

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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

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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&₅₀₀ = 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) 7.60.

B) 9.14.

C) 7.98.

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P/E Ratio = 0.60 / (0.1289 - 0.0500) = 7.60.

Required rate of return on equity will be 12.89% = 6.75% + 1.17(12.00% - 6.75).

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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.

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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.

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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) 10.0.

C) 8.1.

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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

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An analyst gathered the following information about Weston Chemical’s stock:

• Estimated sales per share = $12.19
• Earnings before interest, taxes, depreciation, and amortization (EBITDA) = 73%
• Interest expense per share = $2.07
• Depreciation expense per share = $6.21
• The tax rate = 35%

Weston’s estimated earnings per share (EPS) is closest to:

A) $2.54.

B) $0.40.

C) $3.11.

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Estimate EPS as: [(sales per share)(EBITDA %) – depreciation per share – interest per share][1 – tax rate] = [($12.19)(0.73) – $6.21 – $2.07][1 – 0.35] = $0.4022 = $0.40.

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Given a beta of 1.55 and a risk-ree rate of 8%, what is the expected rate of return, assuming a 14% market return?

A) 17.3%.

B) 12.4%.

C) 20.4%.

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k = 8 + 1.55(14-8)
= 8 + 1.55(6)
= 8 + 9.3
= 17.3

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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&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 appropriate P/E ratio for Parker Corp. will be:

A) 21.54.

B) 12.31.

C) 11.61.

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The appropriate P/E ratio for Parker will be 11.61.

P/E ratio = 0.80 / (0.1289 - 0.0600) = 11.61

Where r = required rate of return on equity, g_n = growth rate in dividends (forever).

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.