Reading 43: Market-Based Valuation: Price Multiples- LOS

following, border, center, table

Q11. An analyst has gathered the following fundamental data:

	Firm A	Firm A	Firm B	Firm B
Strategy	High Margin Low Volume	Low Margin High Volume	High Margin Low Volume	Low Margin High Volume
Payout Ratio	40%	40%	40%	40%
Required Rate of Return	11%	11%	11%	11%
Growth Rate in Dividends	9%	5%	5%	7%
Sales/Book Value of Equity	1.5	4.5	1.0	3
Profit Margin	10%	2%	9%	4%
Book Value	$150	$150	$125	$125

What is the price-to-sales (P/S) multiple for Firm A in the high-margin, low-volume strategy?

A) 2.00.

B) 2.18.

C) 0.13.

Q12. What is the P/S multiple for Firm B in the low-margin, high-volume strategy?

A) 0.60.

B) 0.43.

C) 2.00.

Q13. 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.

Q14. 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) 0.109.

C) 0.114.

Q15. 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.

Q16. An analyst has gathered the following fundamental data:

	Firm A	Firm B	Firm C	Firm D
Payout Ratio	75%
Required Rate of Return	12%	12%	12%	12%
Return on Equity (ROE)	20%	15%	30%	14%
Price/Book Value (PBV) Ratio		3.00	0.70	3.50

What is the PBV ratio for Firm A?

A) 1.25.

B) 2.14.

C) 0.71.

Q17. (Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.)

If CVR, Inc., has a required return for shareholders of 10%, what is its appropriate leading price-to-sales (P/S) multiple if the firm undertakes the high margin/low volume strategy?

A) 1.46.

B) 0.20.

C) 0.80.