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Q17. Assume that a firm has an expected dividend payout ratio of 20%, a required rate of return of 9%, and an expected dividend growth of 5%. What is the firm's estimated price-to-earnings (P/E) ratio? ffice ffice" />
A) 2.22.
B) 20.00.
C) 5.00.
Correct answer is C)
The price-to-earnings (P/E) ratio is equal to (D1/E1)/(k – g) = 0.2/(.09 – 0.05) = 5.00.
Q18. Assuming that a company's return on equity (ROE) is 12% and the required rate of return is 10%, which of the following would most likely cause the company's P/E ratio to rise?
A) The firm's ROE falls.
B) The inflation rate falls.
C) The firm's dividend payout rises.
Correct answer is B)
§ Decrease in the expected inflation rate. The expected inflation rate is a component of ke (through the nominal risk free rate). ke can be represented by the following: nominal risk free rate + stock risk premium, where nominal risk free rate = [(1 + real risk free rate)(1 + expected inflation rate)] – 1.
§ If the rate of inflation decreases, the nominal risk free rate will decrease.
§ ke will decrease.
§ The spread between ke and g, or the P/E denominator, will decrease.
§ P/E ratio will increase.
(An increase in the stock risk premium would have the opposite effect.)
§ Decrease in ROE: ROE is a component of g. As g decreases, the spread between ke and g, or the P/E denominator, will increase, and the P/E ratio will decrease.
§ Increase in dividend payout/reduction in earnings retention. In this case, an increase in the dividend payout will likely decrease the P/E ratio because a decrease in earnings retention will likely lower the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of ke and ROE. If the company is earning a higher rate on new projects than the rate required by the market (ROE> ke), investors will likely prefer that the company retain more earnings. Since an increase in the dividend payout would decrease earnings retention, the P/E ratio would fall, as investors will value the company lower if it retains a lower percentage of earnings.
Q19. If a company has a "0" earnings retention rate, the firm's P/E ratio will equal:
A) k + g
B) 1 / k
C) D/P + g
Correct answer is B)
P/E = div payout ratio / (k ? g)
where g = (retention rate)(ROE) = (0)(ROE) = 0
Dividend payout = 1 ? retention ratio = 1 ? 0 = 1
P/E = 1 / (k ? 0) = 1 / k
Q20. An analyst gathered the following information for a company:
- Risk-free rate = 6.75%
- Expected market return = 15.00%
- Beta = 1.30
- Dividend payout ratio = 55%
- Profit margin = 10.0%
- Total asset turnover = 0.75
- Assets to equity ratio = 2.00
What is the firm’s sustainable growth rate?
A) 6.75%
B) 15.00%.
C) Tax rate needed to determine answer.
Correct answer is A)
Sustainable Growth (g) = ROE × Earnings Retention Rate, or ROE × (1 ? Dividend Payout)
ROE = Profit Margin × Total Asset Turnover × Financial Leverage Multiplier = 0.10 × 0.75 × 2 = 0.15
g = 0.15 × 0.45 = 0.0675, or 6.75%.
Q21. What is the capital asset pricing model (CAPM) required rate of return for this stock?
A) 10.73%.
B) 19.50%.
C) 17.48%.
Correct answer is C)
CAPM Reg. Return = Risk-free Rate + Beta (Market Ret. ? Risk-Free Ret.)
= 6.75 + 1.30 (15.00 ? 6.75) = 17.48
Q22. What is the price-earnings ratio for this firm?
A) 18.14X.
B) 5.13X.
C) 22.18X.
Correct answer is B)
Price / Earnings ratio = (Dividend Payout Ratio) / (k ? g), where k is based on the CAPM required return = 0.55 / (0.1748 ? 0.0675) = 5.13.
Q23. Assuming that the most recent year’s earnings are $2.27, what is the estimated value of the stock using the earnings multiplier method of valuation?
A) $29.14.
B) $41.18.
C) $12.43.
Correct answer is C)
Using the components calculated in prior questions:
P = (Next year's earnings E1) × (P/E ratio)
Next year's earnings = E1 = E0 × (1 + g) = (2.27) × (1.0675) = 2.4232
P = (2.4232)(5.13) = $12.43
Q24. A company currently has a required return on equity of 14% and an ROE of 12%. All else equal, if there is an increase in a firm’s dividend payout ratio, the stock's value will most likely:
A) increase.
B) either increase or decrease.
C) decrease.
Correct answer is A)
Increase in dividend payout/reduction in earnings retention.In this case, an increase in the dividend payout will likely increase the P/E ratio because a decrease in earnings retention will likely increase the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of ke and ROE. If the company is earning a lower rate on new projects than the rate required by the market (ROE < ke), investors will likely prefer that the company pay out earnings rather than investing in lower-yield projects. Since an increase in the dividend payout would decrease earnings retention, the P/E ratio would rise, as investors will value the company higher if it retains a lower percentage of earnings.
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发表于 2009-3-2 14:13
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