Reading 49: Residual Income Valuation - LOS i ～ Q1-3 black

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1．An analyst is considering the purchase of Delphos Machinery, which has a price to book value (P/B) ratio of 8.00. Return on equity (ROE) is expected to be 14 percent, current book value per share is $12.00, and the cost of equity is 11 percent. What growth rate is implied by the current P/B rate?

A)   8.43%.

B)   14.00%.

C)   10.57%.

D)   11.00%.

2．An investor is considering the purchase of Microscopics, which has a price to book value (P/B) ratio of 4.00. Return on equity (ROE) is expected to be 12 percent, current book value per share is $12.00, and the cost of equity is 10 percent. What growth rate is implied by the current P/B rate?

A)   9.33%.

B)   0.67%.

C)   10.00%.

D)   12.00%.

3．An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/B) ratio of 6.00. Return on equity (ROE) is expected to be 13 percent, current book value per share is $13.00, and the cost of equity is 11 percent. What growth rate is implied by the current P/B rate?

A)   0.40%.

B)   13.00%.

C)   10.60%.

D)   11.00%.

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答案和详解如下：

1．An analyst is considering the purchase of Delphos Machinery, which has a price to book value (P/B) ratio of 8.00. Return on equity (ROE) is expected to be 14 percent, current book value per share is $12.00, and the cost of equity is 11 percent. What growth rate is implied by the current P/B rate?

A)   8.43%.

B)   14.00%.

C)   10.57%.

D)   11.00%.

The correct answer was C)    

The P/B ratio of 8.00 and the current book value per share of $12.00 imply a current market price of $96.00. This implies a growth rate of:

g = r – [{B₀(ROE – r)}/{V₀ – B₀}] = 0.11 – [{12.00(0.14 – 0.11)}/{96.00 – 12.00}] = 0.1057 = 10.57%.

Note that the reading in the curriculum does not provide this expression directly.

2．An investor is considering the purchase of Microscopics, which has a price to book value (P/B) ratio of 4.00. Return on equity (ROE) is expected to be 12 percent, current book value per share is $12.00, and the cost of equity is 10 percent. What growth rate is implied by the current P/B rate?

A)   9.33%.

B)   0.67%.

C)   10.00%.

D)   12.00%.

The correct answer was A)

The P/B ratio of 4.00 and the current book value per share of $12.00 imply a current market price of $48.00. This implies a growth rate of:

g = r – [{B₀(ROE – r)}/{V₀ – B₀}] = 0.10 – [{12.00(0.12 – 0.10)}/{48.00 – 12.00}] = 0.0933 = 9.33%.

Note that the reading in the curriculum does not provide this expression directly.

3．An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/B) ratio of 6.00. Return on equity (ROE) is expected to be 13 percent, current book value per share is $13.00, and the cost of equity is 11 percent. What growth rate is implied by the current P/B rate?

A)   0.40%.

B)   13.00%.

C)   10.60%.

D)   11.00%.

The correct answer was C)    

The P/B ratio of 6.00 and the current book value per share of $13.00 imply a current market price of $78.00. This implies a growth rate of:

g = r – [{B₀(ROE – r)}/{V₀ – B₀}] = 0.11 – [{13.00(0.13 – 0.11)}/{78.00 – 13.00}] = 0.1060 = 10.60%.

Note that the reading in the curriculum does not provide this expression directly.