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Exam 11: Equity Valuation

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Question 21

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A firm's earnings per share increased from $10 to $12, its dividends increased from $4.00 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that ________.

A) the share experienced a drop in its P/E ratio
B) the company had a decrease in its dividend payout ratio
C) both earnings and share price increased by 20%
D) the required rate of return increased

E) C) and D)
F) B) and D)

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Question 22

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Transportation shares currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the shares are selling at $60 per share, what must be the market's expectation of the constant growth rate of TTT dividends?

A) 5%
B) 10%
C) 20%
D) None of the above

E) B) and C)
F) None of the above

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Question 23

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When Google's share price reached $475 per share Google had a P/E ratio of about 68 and an estimated market capitalisation rate of 11.5%. Google pays no dividends. What percentage of Google's share price was represented by PVGO?

A firm has a share price of $55 per share and a P/E ratio of 75. If you buy the shares at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment?

Grott and Perrin Ltd has expected earnings of $3 per share for next year. The firm's ROE is 20% and its earnings retention ratio is 70%. If the firm's market capitalisation rate is 15%, what is the present value of its growth opportunities?

Ace Frisbee Corporation produces a good that is very mature in their product life cycles. Ace Frisbee Corporation is expected to pay a dividend in Year 1 of $3.00, a dividend in Year 2 of $2.00, and a dividend in Year 3 of $1.00. After Year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the shares is 8%. Using the multistage DDM, the shares should be worth ________ today.

If a firm increases its plowback ratio this will probably result in a(n) ________ P/E ratio.

An underpriced share provides an expected return which is ________ the required return based on the capital asset pricing model (CAPM) .

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the shares. At what price would you expect ART to sell?

Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's shares is 1.20. Using the CAPM, an appropriate required return on Westsyde Tool Company's shares is ________.

Suppose that in 2009 the expected dividends of the shares in a broad market index equalled $240 million when the discount rate was 8% and the expected growth rate of the dividends equalled 6%. Using the constant growth formula for valuation, if interest rates increase to 9% the value of the market will change by ________.

Lifecycle Motorcycle Company is expected to pay a dividend in Year 1 of $2.00, a dividend in Year 2 of $3.00, and a dividend in Year 3 of $4.00. After Year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the shares is 12%. Using the multistage DDM, the shares should be worth ________ today.

A firm that has an ROE of 12% is considering cutting its dividend payout. The shareholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statement(s) is/are correct? I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's share price will go up after the payout change. III. All else equal, the firm's P/E ratio will increase after the payout change.

The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25, what is the market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

Sanders Ltd, paid a $4.00 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the share, the value of the share is ________.

Each of two shares, A and B, are expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both shares. You require a return of 10% on Share A and a return of 12% on Share B. Using the constant growth DDM, the intrinsic value of Share A ________.

A firm has an earnings retention ratio of 40%. The shares have a market capitalisation rate of 15% and an ROE of 18%. What is the share's P/E ratio?

Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The shares of Caribou Gold Mining Corporation have a beta of -0.50. Using the CAPM, the return you should require on the shares is ________.

If a share is correctly priced then you know that ________.

Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate on the shares, and the constant growth DDM to determine the intrinsic value of the shares. The shares are trading in the market today at $84.00. Using the constant growth DDM and the CAPM, the beta of the shares is ________.