Chapter 4: Q.4B (page 396)
The price of imported oil fell dramatically in late 2008. What sort of macroeconomic shock would this be considered?
Answer
The supply shock
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Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis:
Forecast Industry earnings retention rate | 40% |
Forecast industry returns on equity | 25% |
Industry beta | 1.2 |
Government bond yield | 6% |
Equity risk premium | 5% |
a. Compute the price-to-earnings (P0 / E1) ratio for the industry based on this fundamental data.
b. Jones wants to analyze how fundamental P/E ratios might differ among countries. He gathered the following economic and market data:
Fundamental factors | Country A | Country B |
Forecast growth in real GDP | 5% | 2% |
Government bond yield | 10% | 6% |
Equity risk premium | 5% | 4% |
Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or higher for Country B.
6. Scott Kelly is reviewing MasterToy’s financial statements in order to estimate its sustain-
able growth rate. Using the information presented in Table 14.19 : (LO 14-3)
a. Identify and calculate the components of the DuPont formula.
b. Calculate the ROE for 2013 using the components of the DuPont formula.
c. Calculate the sustainable growth rate for 2013 from the firm’s ROE and plowback ratios. TABLE 14.19
Mastertoy, Inc.: Actual 2012 and estimated 2013 financial
statements for fiscal year ending December 31 (\( million,
except per-share data)
2012 2013
Income Statement
Revenue \)4,750 \(5,140
Cost of goods sold 2,400 2,540
Selling, general, and administrative 1,400 1,550
Depreciation 180 210
Goodwill amortization 10 10
Operating income \) 760 \( 830
Interest expense 20 25
Income before taxes \) 740 \( 805
Income taxes 265 295
Net income \) 475 \( 510
Earnings per share \) 1.79 \( 1.96
Average shares outstanding (millions) 265 260
Balance SheetCash \) 400 \( 400
Accounts receivable 680 700
Inventories 570 600
Net property, plant, and equipment 800 870
Intangibles 500 530
Total assets \)2,950 \(3,100
Current liabilities \) 550 \( 600
Long-term debt 300 300
Total liabilities \) 850 \( 900
Stockholders’ equity 2,100 2,200
Total liabilities and equity \)2,950 \(3,100
Book value per share \) 7.92 $ 8.46
Annual dividend per share 0.55 0.60
If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?
In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?
At Litchfield Chemical Corp. (LCC), a director of the company said that the use of dividend discount models by investors is “proof” that the higher the dividend, the higher the stock price.
a. Using a constant-growth dividend discount model as a basis of reference, evaluate the director’s statement.
b. Explain how an increase in dividend payout would affect each of the following (holding all other factors constant):
i. Sustainable growth rate.
ii. Growth in book value.
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