土豆妮

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

土豆妮

A firm’s return on equity (ROE) is 14%, its required rate of return is 10%, and its expected growth rate is 8%. What is the firm’s justified price-to-book value (P/B) based on these fundamentals?

A) 2.00.

B) 2.75.

C) 3.00.

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P₀/E₀ = (ROE – g) / (r – g) = (0.14 – 0.08) / (0.10 – 0.08) = 3.00

土豆妮

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) 13.20.

C) 4.00.

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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.

土豆妮

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) 6.30.

B) 3.80.

C) 4.20.

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

土豆妮

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) 0.64.

B) 1.44.

C) 1.50.

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

土豆妮

What is the appropriate price-to-sales (P/S) multiple of a stock that has a retention ratio of 45%, a return on equity (ROE) of 14%, an earnings per share (EPS) of $5.25, sales per share of $245.54, an expected growth rate in dividends and earnings of 6.5%, and shareholders require a return of 11% on their investment?

A) 0.158.

B) 0.278.

C) 0.227.

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Recall that profit margin is measured as E₀ / S₀. In this example, the profit margin is (5.25 / 245.54) = 0.0214. Thus:

P₀ / S₀ = [(E₀ / S₀)(1 ? b)(1 + g)] / (r ? g) = [0.0214(0.55)(1.065)] / (0.11 ? 0.065) = 0.278