Chapter 4: Q1CP (page 477)
Jones Group has been generating stable after-tax return on equity (ROE) despite declining operating income. Explain how it might be able to maintain its stable after-tax ROE.
If proportionate decline in equity
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Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 12.8 and 12.9. Ludlow’s report concludes that the electric toothbrush industry is in the maturity (i.e., late) phase of its industry life cycle.
a. Select and justify three factors from Table 12.8 that support Ludlow’s conclusion.
b. Select and justify three factors from Table 12.9 that refute Ludlow’s conclusion.
Recalculate the intrinsic value of Honda using the three-stage growth model of Spreadsheet 13.1 (available at www.mhhe.com/bkm; link to Chapter 13 material). Treat each of the following scenarios independently.
a. ROE in the constant-growth period will be 9%.
b. Honda’s actual beta is .95.
c. The market risk premium is 8.5%.
Consider two firms producing smartphones. One uses a highly automated robotics process, while the other uses human workers on an assembly line and pays overtime when there is heavy production demand.
a. Which firm will have higher profits in a recession? In a boom?
b. Which firm’s stock will have a higher beta?
Recalculate the intrinsic value of Honda shares using the free cash flow model of Spreadsheet 13.2 (available at www.mhhe.com/bkm; link to Chapter 13 material). Treat each scenario independently.
a. Honda’s P/E ratio starting in 2015 will be 13.5.
b. Honda’s unlevered beta is .7.
c. The market risk premium is 8.5%.
Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 12%. The stock has a beta of .75. What is the intrinsic value of the stock?
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