Chapter 4: Q.12B (page 397)
FinanceCorp has fixed costs of \(7 million and profits of \)4 million. What is its degree of operating leverage (DOL)?
Answer
2.75
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Shaar (from the previous problem) has revised slightly her estimated earnings growth rate for Rio National and, using normalized (underlying trend) EPS, which is adjusted for temporary impacts on earnings, now wants to compare the current value of Rio National’s equity to that of the industry, on a growth-adjusted basis. Selected information about Rio
National and the industry is given in Table 13.10 .
Compared to the industry, is Rio National’s equity overvalued or undervalued on a P/E-to-growth (PEG) basis, using normalized (underlying) earnings per share? Assume that the risk of Rio National is similar to the risk of the industry.
Tri-coat Paints has a current market value of \(41 per share with earnings of \)3.64. What is the present value of its growth opportunities (PVGO) if the required return is 9%?
The present value of a firm’s projected cash flows are \(15 million. The break-up value of the firm if you were to sell the major assets and divisions separately would be \)20 million. This is an example of what Peter Lynch would call a(n):
a. Stalwart
b. Slow-growth firm
c. Turnaround
d. Asset play
The risk-free rate of return is 5%, the required rate of return on the market is 10%, and High-Flyer stock has a beta coefficient of 1.5. If the dividend per share expected during the coming year, D 1 is $2.50 and g = 4%, at what price should a share sell?
As a securities analyst, you have been asked to review a valuation of a closely held business, Wigwam Autoparts Heaven, Inc. (WAH), prepared by the Red Rocks Group (RRG). You are to give an opinion on the valuation and support your opinion by analyzing each part of the valuation. WAH’s sole business is automotive parts retailing. The RRG valuation includes a section called “Analysis of the Retail Auto Parts Industry,” based completely on the data in Table 12.7 and the following additional information:
• WAH and its principal competitors each operated more than 150 stores at year-end 2010.
• The average number of stores operated per company engaged in the retail auto parts industry is 5.3.
• The major customer base for auto parts sold in retail stores consists of young owners of old vehicles. These owners do their own automotive maintenance out of economic necessity.
a. One of RRG’s conclusions is that the retail auto parts industry as a whole is in the maturity stage of the industry life cycle. Discuss three relevant items of data from Table 12.7 that support this conclusion.
b. Another RRG conclusion is that WAH and its principal competitors are in the consolidation stage of their life cycle. Cite three items from Table 12.7 that suggest this conclusion. How can WAH be in a consolidation stage while its industry is in a maturity stage?
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