Questions and Answers of Equity Asset Valuation

As an analyst for a US domestic equity–income mutual fund, Roberta Kim is evaluating Middlesex Water Company (NASDAQ: MSEX), a publicly traded water utility, for possible inclusion in the approved
In Example 6, the Gordon growth model value for MSEX was estimated as $$21.88$ based on a current dividend of $$0.74$, an expected dividend growth rate of 3.5 percent, and a required return on
Kansas City Southern Preferred 4% (NYSE: KSU-P), issued 2 January 1963, has a par value of $25 per share. Thus, a share pays 0.04($25) = $1.00 in annual dividends. The required return on this
Afton Mines is a profitable company that is expected to pay a $4.25 dividend next year. Because it is depleting its mining properties, the best estimate is that dividends will decline forever at a
Harry Trice wants to use the Gordon growth model to find a justified P/E for the French company Carrefour SA (NYSE Euronext: CA), a global food retailer specializing in hypermarkets and supermarkets.
Carl Zeiss Meditec AG (Deutsche Börse XETRA: AFX), 65 percent owned by the Carl Zeiss Group, provides screening, diagnostic, and therapeutic systems for the treatment of ophthalmologic (vision)
Assume that a company is currently paying no dividend and will not pay one for several years. If the company begins paying a dividend of $1.00 five years from now, and the dividend is expected to
Françoise Delacour, a portfolio manager of a US-based diversified global equity portfolio, is researching the valuation of Vinci SA (NYSE Euronext: DG). Vinci is the world’s largest construction
An analyst expects JNJ’s (Johnson & Johnson) dividend of $$2.40$ for 2012 to grow by 7.5 percent for six years and then grow by 6 percent into perpetuity. A recent price for JNJ as of
Suppose that a company’s ROE is 25 percent and its retention rate is 60 percent. According to the expression for the sustainable growth rate, the dividends should grow at g = b × ROE = 0.60 × 25
Baggai Enterprises has an ROA of 10 percent, retains 30 percent of earnings, and has an equity multiplier of 1.25. Mondale Enterprises also has an ROA of 10 percent, but it retains two-thirds of
International Business Machines (NYSE: IBM), which currently pays a dividend of $$3.40$ per share, has been the subject of two other examples in this reading. In one example, an analyst estimated
An analyst is preparing a forecast of dividends for Hoshino Distributors for the next five years. He uses a spreadsheet model with the following assumptions:• Sales are $100 million in Year 1.They
Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of:A. auditing.B. financial reporting.C. financial
Equity equals:A. Assets – Liabilities.B. Liabilities – Assets.C. Assets + Liabilities.
Novo Nordisk is a Denmark-based biopharmaceutical company with a focus on diabetes drugs. The company provides detailed disclosure of revenue along geographic, business segment, and product lines.
Use the data in Example 1 on Novo Nordisk to answer the following questions:i. Xiaoping Wu is an equity analyst covering European pharmaceutical companies for his clients in China. Wu projects that
Walgreens and Rite Aid are two of the largest retail drugstore chains in the United States. For both companies, around two-thirds of their sales are from prescription pharmaceuticals, with the
As shown in Exhibit 5, L’Oréal reported an operating margin of 16% in 2011, which makes it the most profitable company among beauty companies. However, the average operating margin of 18% for home
The consumer goods company Unilever reported an overall operating margin of 14.9%in 2011. As shown in Exhibit 7, the operating margin is higher in the slower growing Western European and Americas
Dutch grocer Ahold has a debt structure with a relatively high amount of cash on its balance sheet.i. Calculate the interest expense on the average gross debt and interest rate on the average cash
ABC, a hypothetical company, operates in Countries A and B. The tax rate in Country A is 40%, and the tax rate in Country B is 10%. In the first year, the company generates an equal amount of profit
i. Management at a restaurant chain intends to maintain a 40% debt-to-capital ratio.Management has a track record of meeting its capital structure targets. The restaurant chain is solidly profitable,
Carlsberg is the smallest of the global brewers, but it is the dominant beer company in Russia. In 2011, Carlsberg’s subsidiary Baltika was the market leader in Russia with a 37% market share,
Global supermarket chain Carrefour is likely to be confronted with 5% inflation in its cost of goods sold (with stable volume). Four analysts have their own expectations about how the company will
Two consumer staple companies—Swiss chocolate specialist Lindt and global food producer Nestlé—have costs that are constantly affected by inflation and deflation.Exhibit 29 presents a common
The worldwide tablet market experienced a major technological development with the introduction of the Apple iPad in April 2010, which has important implications for the personal computer (PC)
Answer the following questions using Exhibits 31 through 35 on Microsoft:i. Estimate post-cannibalization global PC shipments in FY2012 assuming a cannibalization factor for consumers of 40% and 15%
Long-term historical average valuation multiples are frequently used in equity analysis as a reference point or as justification of a target multiple at which the shares are expected to trade in the
i. A ir France-KLM operates in the highly cyclical airline industry. Operating margins for the last nine years are shown in the following table.On the basis of only the information in the table,
Based on Exhibit 2, the forward-looking estimate for the US equity risk premium is closest to:A. 2.2%.B. 5.8%.C. 8.2%.Judy Chen is the primary portfolio manager of the global equities portfolio at
Based on Exhibit 3, and assuming interest on debt is tax-deductible, the weighted average cost of capital (WACC) for Bezak, Inc. is closest to:A. 10.87%.B. 11.36%.C. 13.61%.Judy Chen is the primary
The estimate of beta for Twin Industries is closest to:A. 0.44.B. 0.85.C. 0.89.Judy Chen is the primary portfolio manager of the global equities portfolio at Horizon Asset Management. Lars Johansson,
A potential weakness of Johansson’s approach to estimating the required return on equity for Twin Industries is that the return estimate:A. does not include a size premium.B. may overstate
Analysts commonly encounter a number of labels related to the cyclical/non-cyclical distinction. For example, non-cyclical industries have sometimes been sorted into defensive(or stable) versus
Suppose that an analyst needs to identify the peer group of companies for Brink’s Home Security for use in the valuation section of a company report. Brink’s is a provider of electronic security
In the United States, Canada, and Australia, the end of World War II marked the beginning of a sustained period of elevated birth rates per thousand in the population. This rise reflected the relief
On 31 October 2006, in an effort to halt the rapid growth of income trust structures in the Canadian stock market, Canada’s Minister of Finance James Flaherty announced that these tax-exempt
The aerospace, construction, and firearms industries are prime examples of industriesfor which governments are major customers and whose revenues and profits aresignificantly—in some cases,
The global airline industry exemplifies many of the concepts and influences we havediscussed.Life-Cycle StageThe industry can be described as having some mature characteristics because averageannual
Based on Exhibit 1, which of the following provides the strongest evidence that Chrome displays economies of scale?A. Increasing net sales B. Profit margins that are increasing with net sales C.
Based on Exhibit 2, the job candidate most likely to be using a bottom-up approach to model net sales is:A. Candidate A.B. Candidate B.C. Candidate C.Angela Green, an investment manager at Horizon
Based on Exhibit 2, the modeling approach used by Candidate B to project future net sales is most accurately classified as a:A. hybrid approach.B. top-down approach.C. bottom-up approach.Angela
Based on Exhibits 1 and 2, Candidate C’s forecast for cost of sales in 2013 is closest to:A. $18.3 million.B. $18.9 million.C. $19.3 million.Angela Green, an investment manager at Horizon
Based on Exhibits 1 and 2, Candidate A’s forecast for selling, general, and administrative expenses in 2013 is closest to:A. $23.8 million.B. $25.5 million.C. $27.4 million.Angela Green, an
Based on Exhibit 2, forecasted interest expense will reflect changes in Chrome’s debt level under the forecast assumptions used by:A. Candidate A.B. Candidate B.C. Candidate C.Angela Green, an
Which return metric should French use to assess Archway’s five-year historic performance relative to its competitors?A. Return on equity B. Return on invested capital C. Return on capital employed
Based on the current competitive landscape presented in Exhibit 3, French should conclude that Archway’s ability to:A. pass along price increases is high.B. demand lower input prices from suppliers
Based on the current competitive landscape presented in Exhibit 3, Archway’s operating profit margins over the forecast horizon are least likely to:A. decrease.B. remain constant.C. increase.Nigel
Based on Exhibit 4, Archway’s forecasted gross profit margin for 2015 is closest to:A. 62.7%.B. 67.0%.C. 69.1%.Nigel French, an analyst at Taurus Investment Management, is analyzing Archway
French’s approach to forecasting Archway’s working capital accounts would be most likely classified as a:A. hybrid approach.B. top-down approach.C. bottom-up approach.Nigel French, an analyst at
The most appropriate response to Wright’s question about the technological development is to:A. increase the required return.B. decrease the price-to-earnings multiple.C. decrease the perpetual
Using Porter’s five forces analysis, which of the following competitive factors is likely tohave the greatest impact on Omikroon’s petrol scooter pricing power?A. RivalryB. Threat of
The metric used by Fromm to assess Omikroon’s performance takes into account:A. degree of financial leverage.B. operating liabilities relative to operating assets.C. competitiveness relative to
Based on Omikroon’s expectations, the gross profit margin of Omikroon’s electric scooter division in 2016 is most likely to be affected by:A. competition.B. research costs.C. cannibalization by
Which factor best justifies the five-year forecast horizon for Omikroon selected by Fromm?A. Factor 1 B. Factor 2 C. Factor 3 Gertrude Fromm is a transportation sector analyst at Tucana Investments.
Fromm’s sensitivity analysis will result in a decrease in the 2015 base case gross profit margin closest to:A. 0.55 percentage points.B. 0.80 percentage points.C. 3.32 percentage points.Gertrude
Fromm’s estimate of growth capital expenditure included in Omikroon’s property, plant, and equipment under Scenario 2 should be:A. lower than under Scenario 1.B. the same as under Scenario 1.C.
In the section of his 2007 letter to the shareholders of Berkshire Hathaway titled “Fanciful Figures—How Public Companies Juice Earnings,” Warren Buffett referred to the investment return
Based on 2012 revenues, the six largest providers of oilfield services are:1. Schlumberger Ltd. (NYSE: SLB)• Revenues: $42.1 billion• Net income: $5.5 billion 2. Halliburton (NYSE: HAL)•
On 21 September 2000, Intel Corporation (NASDAQ -GS: INTC)3 issued a press release containing information about its expected revenue growth for the third quarter of 2000. The announced growth fell
Based on the historical record of surprises in inflation and productivity, the historical equity risk premium for the US equity market, if it is used as an estimate of the forward-looking equity risk
Based upon Exhibit 1, the realized three-year holding period return for Novo-Gemini Inc.was closest to:A. 39.76%.B. 42.76%.C. 44.82%.Judy Chen is the primary portfolio manager of the global equities
Based upon Exhibit 1, the expected three-year holding period return for Novo-Gemini Inc. at the time of purchase was closest to:A. 39.76%.B. 42.76%.C. 44.82%.Judy Chen is the primary portfolio
Taking an indirect, total firm value approach to valuing equity, suppose you have the inputs for estimating the cost of capital shown in Exhibit 10. Based only on the information given, estimate
You are valuing the stock of International Business Machines Corporation (NYSE:IBM) as of early August 2013, and you have gathered the following information:The IBM bonds, you note, are investment
A common stock has the following characteristics:Based only on the information given, infer the style characteristics of the above common stock issue. Market beta 1.50 Size beta 0.15 Value beta -0.52
Weeramantry’s next task in researching Microsoft shares is to estimate a required return on equity (which is also a required return on total capital because Microsoft has no long-term debt).
Jill Adams is an analyst at a hedge fund that has been offered an equity stake in a privately held US property and liability insurer. Adams identifies Alleghany Corporation(NYSE: Y) as a publicly
Adams turns to determining a beta for use in evaluating the offer of an equity stake in a private insurer and rounds her beta estimate of Alleghany, the public comparable, to 0.70. As of the
Exxon Mobil Corporation, BP p.l.c., and Total S.A. are three “super major” integrated oil and gas companies headquartered, respectively, in the United States, the United Kingdom, and France. An
While Weeramantry has been researching Microsoft, his colleague Delacour has been investigating the required return on Larsen & Toubro Ltd. shares (BSE: 500510, NSE:LT).36 Larsen & Toubro
Historical estimates of the equity risk premium in developing markets are often attended by a range of concerns. The case of India can serve as an example. A number of equity indexes are available
Thomas Weeramantry and Françoise Delacour are co-managers of a US-based diversified global equity portfolio. They are researching Microsoft Corporation (NASDAQ-GS:MSFT),5 the largest
Which valuation model would the director of research most likely recommend Lee use to estimate the value of VEGA?A. Free cash flow B. Dividend discount C. P/E relative valuationGuardian Capital is
Which valuation model is Richardson applying in his analysis of the retailers?A. Relative value B. Absolute value C. Sum-of-the-parts Guardian Capital is a rapidly growing US investment firm. The
Which of the following statements about the reported earnings of Renaissance Clothing is most accurate? Relative to sustainable earnings, reported earnings are likely:A. unbiased.B. upward biased.C.
Based on Richardson’s industry analysis, which of the following characteristics of men’s retail clothing retailing would positively affect its profitability? That industry’s:A. entry costs.B.
According to Statement 5, analysts are expected to use valuation concepts and models to:A. value private businesses.B. render fairness opinions.C. extract market expectations.Guardian Capital is a
With respect to Statement 4, which measure of value is most relevant for the analyst of the fund described?A. Liquidation value B. Investment value C. Going-concern value Guardian Capital is a
With respect to Statements 3 and 4, which of the following measures of value would the distressed securities fund’s analyst consider that a core equity fund analyst might ignore?A. Fair value B.
Based on Statement 2, which of the following sources of perceived mispricing do active investment managers attempt to identify? The difference between:A. intrinsic value and market price.B. estimated
The following two passages are closely based on the valuation discussions of actual companies in two actual short research notes. The dates and company names used in the passages, however, are
Donaldson Company, Inc. (NYSE: DCI) is one of the largest and most successful filtration manufacturers in the world. Consistent with FASB guidance related to segment reporting, the company has
When analysts at brokerage firms recommend a stock to the public that later performs very poorly, or when they fail to uncover negative corporate activities, they can sometimes come under public
While researching Smithson Genomics, Inc., a (fictitious) healthcare information services company, you encounter a difference of opinions. One analyst’s report claims that Smithson is at least 15
Analysts often apply asset-based valuation to natural resource companies. For example, a crude oil producer such as Petrobras (NYSE: PBR) might be valued on the basis of the market value of its
Livent, Inc. was a publicly traded theatrical production company that staged a number of smash hits such as Tony–award winning productions of Showboat and Fosse. Livent capitalized preproduction
The beta of Tasty Foods stock of 1.10 used by Rae in computing the required return on equity was based on monthly returns for the past 10 years. If Rae uses daily returns for the past 5 years, the
The total discount for both control and marketability is closest toA. 15 percent.B. 32 percent.C. 35The senior vice president of acquisitions for Northland Industries, Angela Lanton, and her head
Using the excess earnings method, the value of the intangibles is closest toA. $144.0 million.B. $205.7 million.C. $338.8 million.The senior vice president of acquisitions for Northland Industries,
The guideline transaction that is most likely applicable to FAMCO isA. Firm 1.B. Firm 2.C. Firm 3.The senior vice president of acquisitions for Northland Industries, Angela Lanton, and her head
The normalized earnings after tax for FAMCO is closest toA. $32,940,000.B. $34,260,000.C. $34,860,000.The senior vice president of acquisitions for Northland Industries, Angela Lanton, and her head
Using an asset-based approach, the value (net of debt) of Oakstar is closest toA. $62,250,000.B. $87,250,000.C. $199,750,000.The senior vice president of acquisitions for Northland Industries, Angela
Which of the following statements concerning asset-based valuation as applied to Oakstar is most accurate? The approach is applicableA. Only when a guideline public company for the valuation is not
The indicated value of Thunder’s equity using the build-up method and the capitalized cash flow method (CCM) based on free cash flow to equity is closest toA. $29.41 million.B. $38.46 million.C.
Regarding the two statements about discount rate estimates, Chin isA. Correct with respect to adding the small stock premium and correct with respect to the weighted average cost of capital.B.
The free cash flow to the firm is closest toA. $23,031,000.B. $25,441,000.C. $36,091,000.Alan Chin, the chief executive officer of Thunder Corporation, has asked his chief financial officer,
Ebinosa can best value Thunder using theA. Excess earnings approach.B. Asset-based approach.C. Discounted free cash flow approach.Alan Chin, the chief executive officer of Thunder Corporation, has
The least likely factor that would be a source of differences in valuing Thunder compared with valuing a publicly traded company isA. Access to public debt markets.B. Agency problems.C. The size of

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