Questions and Answers of Equity Asset Valuation

Janet Larsen manages an institutional portfolio and is currently looking for new stocks to add to the portfolio. Larsen has a commercial database with information on US stocks. She has designed
Bugg Properties’ expected EPS is $$2.00$ $$2.50$ and $$4.00$ for the next three years.Analysts expect that Bugg will pay dividends of $$1.00$ $$1.25$ and $$12.25$ for the three years.
To recap the data from Example 3, Bugg Properties has expected earnings per share of$$2.00,$ $$2.50,$ and $$4.00$ and expected dividends per share of $$1.00,$ $$1.25,$ and $$12.25$ for
Robert Sumargo, an equity analyst, is considering the valuation of Google (NDQ:-GOOG), in late 2013 when a recent closing price is $$896.57.$ Sumargo notes that in general GOOG had a fairly high
Joseph Yoh is evaluating a purchase of Canon, Inc. (NYSE: CAJ). Current book value per share is $$26.24$ and the current price per share is $$34.68$ (from Value Line, 26 July 2013). Yoh expects
Suppose a company has a beta of 1.1. The risk-free rate is 5.6 percent, and the equity risk premium is 6 percent. The current dividend of $$2.00$ is expected to grow at 5 percent indefinitely. The
Bob Inguigiatto, CFA, has been given the task of developing mean return estimates for a list of stocks as preparation for a portfolio optimization. On his list is NextEra Energy, Inc. (NYSE: NEE),
An analyst is reviewing the valuation of DuPont (NYSE: DD) as of the beginning of July 2013 when DD is selling for $$52.72$ . In the previous year, DuPont paid a $$1.70$ dividend that the
IBM (as of early 2013) pays a dividend of $$3.30$ per year. A current price is $$194.98.$ An analyst makes the following estimates:• the current required return on equity for IBM is 9 percent,
Elaine Bouvier is evaluating Energen (NYSE: EGN) for possible inclusion in a smallcap growth-oriented portfolio. Headquartered in Alabama, EGN is a diversified energy company involved in oil and gas
Yang Co. is expected to pay a $$21.00$ dividend next year. The dividend will decline by 10 percent annually for the following three years. In Year 5, Yang will sell off assets worth $$100$ per
In Example 17, the analyst estimated the dividend growth rate of IBM in the final stage of a three-stage model as 6.75 percent. This value was based on the expressionIBM’s payout ratio has
John Smith is the sole shareholder and CEO of Able Manufacturing, Inc. Smith has put Able up for sale in advance of his retirement. James Duvall, a manager in the corporate venturing unit of a public
Duvall and his advisers have decided to use an income approach to value Able Manufacturing.Because of its years of operating successfully and its owner’s conservative nature, Able operated with
Duvall and his team are comfortable with the normalized earnings, growth, and discount rate estimated for Able. Detailed projections for Able are not developed by management. Suppose that free cash
Duvall decides to use the GPCM to develop a value indication for Able that is independent of the FCF indication he is also pursuing. Duvall believes that many acquirors apply a multiple of market
In addition to the income approach and the guideline public company method, the guideline transactions method was considered and applied. Duvall and his advisers noted:• Pricing multiples from
In a valuation of a financial services company, a business appraiser estimated four values for the company using four different approaches, which he characterized as follows:i. Discounted cash flow
Suppose that Jane Doe owns 10 percent of the stock of Able, and that the remaining 90 percent is held by CEO John Smith. Smith is interested in selling Able to a third party. Smith advised Doe that
LaForge Systems, Inc. has net income of $285 million for the year 2008. Using information from the company’s financial statements given here, show the adjustments to net income that would be
For LaForge Systems, whose financial statements are given in Problem 2, show the adjustments from the current levels of CFO (which is $427 million), EBIT ($605 million), and EBITDA ($785 million) to
John Jones, CFA, is head of the research department of Peninsular Research. One of the companies he is researching, Mackinac Inc., is a US-based manufacturing company.Mackinac has released the June
Holt’s FCFE (in millions) for 2008 is closest to:A. $175.B. $250.C. $364.Ryan Leigh is preparing a presentation that analyzes the valuation of the common stock of two companies under consideration
Cagiati Enterprises has FCFF of 700 million Swiss francs (CHF) and FCFE of CHF620 million. Cagiati’s before-tax cost of debt is 5.7 percent, and its required rate of return for equity is 11.8
Cane Distribution, Inc., incorporated on 31 December 2009 with initial capital infusions of $$224$,000 of debt and $$336$,000 of common stock, acts as a distributor of industrial goods. The
Use the information from the statement of cash flows given in Exhibit 5 to calculate FCFF for the three years 2010−2012. The tax rate (as given in Exhibit 1) is 30 percent. EXHIBIT 5 Cane
Syngenta AG (SWX: SYNN), a company domiciled and incorporated in Switzerland, is a world-leading agribusiness operating in the Crop Protection, Seeds and Lawn and Garden markets. Crop Protection
Ryanair Holdings PLC (LSE: RYA) operates a low-fare scheduled passenger airline serving short-haul, point-to-point routes between Ireland, the United Kingdom, Continental Europe, and Morocco. The
The balance sheet, income statement, and statement of cash flows for the Pitts Corporation are shown in Exhibit 11. Note that the statement of cash flows follows a convention according to which the
Use Pitts Corporation data to compute its FCFF for the next three years. Assume that growth in FCFF remains at the historical levels of 15 percent a year. The answer is (in millions): 2012 Actual
Continuing her work, Espinosa decides to forecast FCFF for the next five years. She is concerned that Pitts Corporation will not be able to maintain its historical EBIT margin and that the EBIT
Espinosa decides to forecast FCFE for the year 2013. She uses the same expectations derived in Example 9. Additionally, she expects the following:• the profit margin will remain at 8 percent (=
A recent job applicant made some interesting comments about FCFE and FCFF: “I don’t like the definitions for FCFE and FCFF because they are unnecessarily complicated and confusing. The best
Welch Corporation uses bond, preferred stock, and common stock financing. The market value of each of these sources of financing and the before-tax required rates of return for each are given in
YPF Sociedad Anonima (NYSE: YPF) is an integrated oil and gas company headquartered in Buenos Aires, Argentina. Although the company’s cash flows have been volatile, an analyst has estimated a per
Steve Bono is valuing the equity of Petroleo Brasileiro (NYSE: PBR), commonly known as Petrobras, in early 2013 (before the release of 2012 financial results) by using the single-stage
Uwe Henschel is doing a valuation of TechnoSchaft on the basis of the following information:• Year 0 sales per share = €25.• Sales growth rate = 20 percent annually for three years and 6
Vishal Noronha needs to prepare a valuation of Sindhuh Enterprises. Noronha has assembled the following information for his analysis. It is now the first day of 2013.• EPS for 2012 is $2.40.• For
Charles Jones is evaluating Reliant Home Furnishings by using a three-stage growth model. He has accumulated the following information:• Current FCFF = $745 million.• Outstanding shares = 309.39
Christie Johnson, CFA, has been assigned to analyze Sundanci. Johnson assumes that Sundanci’s earnings and dividends will grow at a constant rate of 13 percent. Exhibits 1 and 2 provide financial
Jorge Zaldys, CFA, is researching the relative valuation of two companies in the aerospace/defense industry, NCI Heavy Industries (NCI) and Relay Group International (RGI ). He has gathered relevant
Kirstin Kruse, a portfolio manager, has an important client who wants to alter the composition of her equity portfolio, which is currently a diversified portfolio of 60 global common stocks. Because
Based on the information in Exhibit 1, the most appropriate price-to-earnings ratio to use in the valuation of Delite is closest to:A. 18.71.B. 19.04.C. 24.44.Mark Cannan is updating research reports
Based upon the information in Exhibit 1, the price-to-sales ratio for You Fix It is closest to:A. 0.28.B. 0.55.C. 0.90.Mark Cannan is updating research reports on two well-established consumer
Which valuation approach would be most appropriate in valuing shares of You Fix It?A. Approach 1 B. Approach 2 C. Approach 3 Mark Cannan is updating research reports on two well-established consumer
Cannan’s preference to use the P/E ratio over the P/S ratio is best supported by:A. Reason 1 B. Reason 2 C. Reason 3 Mark Cannan is updating research reports on two well-established consumer
The cash flow measure that Ritter would most likely recommend to address Cannan’s concern is:A. free cash flow to equity.B. earnings plus non-cash charges.C. earnings before interest, tax,
Based upon the information in Exhibits 1 and 2, Cannan would most likely conclude that Delite’s shares are:A. overvalued.B. undervalued.C. fairly valued.Mark Cannan is updating research reports on
The measure of central tendency that Ritter will most likely recommend is the:A. median.B. harmonic mean.C. arithmetic mean.Mark Cannan is updating research reports on two well-established consumer
For the fiscal year ended 31 December 2012, WPP Group PLC (London: WPP) reported basic EPS of £66.2 and diluted EPS of £62.8. Based on a closing stock price of£1058.0 on 1 February 2013, the day
In this example, we use alternative definitions of “forward” to compute forward P/Es.Exhibit 4 presents actual and forecasted EPS for Boyd Gaming Corp. (NYSE: BYD)that owns and operates 21 gaming
BP p.l.c. (London: BP) is one of the world’s largest integrated oil producers. As of early September 2013, the company continued to deal with litigation concerns surrounding its role in a 2010
Toyota Motor Corporation (TYO: 7203; NYSE: TM) is one of the world’s largest vehicle manufacturers. The company’s most recent fiscal year ended on 31 March 2013. In early September 2013, you are
You are valuing a food company with a beta of 0.9, a dividend payout ratio of 0.45, and an earnings growth rate of 0.08. The estimated regression for a group of other stocks in the same industry
As a telecommunications industry analyst at a brokerage firm, you are valuing Verizon Communications, Inc. (NYSE: VZ), one of the world’s leading telecommunications companies.The valuation metric
You are analyzing three large-cap US stock issues with approximately equal earnings growth prospects and risk. As one step in your analysis, you have decided to check valuations relative to the
One of the main drivers of P/E for the market as a whole is the level of interest rates.The inverse relationship between value and interest rates can be seen from the expression of P/E in terms of
Yardeni (2000) developed a model that incorporates the expected growth rate in earnings—a variable that is missing in the Fed Model.28 Yardeni’s model iswhere CEY is the current earnings yield on
As of mid-September 2013, you are valuing Honda Motor Company (TSE: 7267;NYSE ADR: HMC), among the market leaders in Japan’s auto manufacturing industry.You are applying the method of comparables
Assume a company with no real earnings growth, such that its earnings growth can result only from inflation, will pay out all its earnings as dividends. Based on the Gordon(constant growth) DDM, the
As of late 2013, few sectors had a wider range of P/B ratios than the US banking industry. Much of these differences in P/B ratios can be attributed to differences in company-specific business
Headquartered in Toronto, Canada, The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group (TSX: TD and NYSE: TD). With operations organized into four segments (Canadian
Edward Stavos is a junior analyst at a major US pension fund. Stavos is researching Barclays PLC (LSE: BARC and NYSE: BCS) for his fund’s Credit Services Portfolio and is preparing background
You are working on a project to value an independent securities brokerage firm. You know the industry had a significant decline in valuations during the 2007−2009 financial crisis. You decide to
Stora Enso Oyj (Helsinki Stock Exchange: STERV) is an integrated paper, packaging, and forest products company headquartered in Finland. In its fiscal year ended 31 December 2012, Stora Enso reported
Groupon (NASDAQ GS: GRPN) is a deal-of-the-day website that features discounted gift certificates usable at local or national companies. Before going public in November 2011, GRPN amended its
As a health care analyst, you are valuing the stocks of three medical equipment manufacturers, including the Swedish company Getinge AB (Stockholm: GETI) in March 2013.Based on an average of
Continuing with the project to value Getinge AB, you have compiled the information on GETI and peer companies Smith & Nephew plc (London: SN) and CR Bard Inc.(NYSE: BCR) given in Exhibit 13.Use
In 2012, Koninklijke Philips Electronics N.V. (Euronext: PHIA and NYSE: PHG) reported net income from continuing operations of €262 million, equal to EPS of €0.28.The company’s depreciation and
Exhibit 15 provides information on P/CF, P/FCFE, and selected fundamentals as of 16 April 2012 for two hypothetical companies. Using the information in Exhibit 15, compare the valuations of the two
William Leiderman is a portfolio manager for a US pension fund’s domestic equity portfolio. The portfolio is exempt from taxes, so any differences in the taxation of dividends and capital gains are
Exhibit 19 presents EV multiples for four companies in the data storage device industry:Western Digital Corporation (NYSE: WDC), Net App (NASDAQ GS: NTA P), EMC Corporation (NYSE: EMC), and Seagate
As described in Example 22, Stora Enso Oyj (Helsinki Stock Exchange: STERV) reported net sales of €10,814.8 million for 2012. Based on 788.6 million shares outstanding and a stock price of €6.72
Exhibit 26 shows the values of the S&P 500 and three exchange-traded funds (ETFs)for the end of each of 18 months from April 2012 through September 2013. The ETFs are for long-term US Treasury
The following excerpts from past equity analyst reports illustrate the use of multiple ratios in communicating views about a stock’s value. In the first excerpt, from a report on Colorpak Ltd.
Based upon the information in Exhibit 1, the market value added of the hypothetical firm is closest to:A. R 65 million.B. R 113 million.C. R 168 million.Mangoba Nkomo, CFA, a senior equity analyst
The most appropriate response to Nkomo’s Question 1 would be that the present value of future residual earnings is expected to be:A. zero.B. positive.C. negative.Mangoba Nkomo, CFA, a senior equity
The most appropriate response to Nkomo’s Question 2 would be that the firm’s return on equity (ROE ) is:A. equal to the firm’s cost of equity.B. lower than the firm’s cost of equity.C. higher
Based upon the information in Exhibit 2, the intrinsic value per share of the equity of Jackson Breweries is closest to:A. R97.67.B. R130.22.C. R186.03.Mangoba Nkomo, CFA, a senior equity analyst
I f Nkomo’s 2010 year-end estimate of Amersheen shares’ intrinsic value was accurate, then Amersheen’s shares were most likely:A. overvalued.B. undervalued.C. fairly valued.Mangoba Nkomo, CFA,
The most appropriate treatment of the estimated restructuring charge, in response to Nkomo’s Question 3, would be:A. an upward adjustment to book value.B. an upward adjustment to the cost of
U nder Scenario 1, the intrinsic value per share of the equity of Amersheen is closest to:A. R13.29.B. R15.57.C. R16.31.Mangoba Nkomo, CFA, a senior equity analyst with Robertson-Butler Investments,
U nder Scenario 2, the intrinsic value per share of the equity of Amersheen is closest to:A. R13.29.B. R15.57.C. R16.31.Mangoba Nkomo, CFA, a senior equity analyst with Robertson-Butler Investments,
Axis Manufacturing Company, Inc. (AXCI), a very small company in terms of market capitalization, has total assets of €2 million financed 50 percent with debt and 50 percent with equity capital. The
David Smith is evaluating the expected residual income as of the end of August 2013 of Silver Wheaton Corporation (NYSE: SLW). Established in 2004 in Vancouver, British Columbia, Silver Wheaton is
Joseph Yoh is curious about the market-perceived growth rate, given that he is comfortable with his other inputs. By using the current price per share of $34.68 for Canon, Yoh solves the following
Diana Rosato, CFA, is considering an investment in Taiwan Semiconductor Manufacturing Ltd., a manufacturer and marketer of integrated circuits. Listed on the Taiwan Stock Exchange(Code: 2330), the
Rosato’s supervisor questions her assumption that Taiwan Semiconductor will have no premium at the end of her forecast period. Rosato assesses the effect of a terminal value based on a perpetuity
Rosato extends her analysis to consider the possibility that ROE will slowly decay toward r in 2033 and beyond, rather than using a perpetuity of Year 2032 residual income.Rosato estimates a
Assume the following data:• A company will earn $1.00 per share forever.• The company pays out all earnings as dividends.• Book value per share is $6.00.• The required rate of return on
Excerpts from two companies’ statements of changes in stockholders’ equity are shown in Exhibits 9 and 10. The first statement, prepared under IFRS as of 31 December 2012, is for Nokia
Exhibit 12 gives per-share forecasts for Mannistore, Inc., a hypothetical company operating a chain of retail stores. The company’s cost of capital is 10 percent.i. A ssuming the forecasted
During the period 1960–2007, earnings of the S&P 500 Index companies have increased at an average rate of 8.18 percent per year, and the dividends paid have increased at an average rate of 5.9
What is the terminal value of the stock based on the first approach?A. C$$17.65$.B. C$$31.06$.C. C$$33.09$.Assorted Fund, a UK-based globally diversified equity mutual fund, is considering
An asset is expected to generate cash flows of $$100$ in one year, $$150$ in two years, and $$200$ in three years. The value of this asset today, using a 10 percent discount rate, isThe value
As director of equity research at a brokerage, you have final responsibility in the choice of valuation models. An analyst covering consumeron-cyclicals has approached you about the use of a dividend
Suppose that you expect Carrefour SA (NYSE Euronext Paris: CA) to pay a €0.58 dividend next year. You expect the price of CA stock to be €27.00 in one year. The required rate of return for CA
For the next five years, the annual dividends of a stock are expected to be $$2.00$, $$2.10$, $$2.20$, $$3.50$, and $$3.75$. In addition, the stock price is expected to be $$40.00$ in
Joel Williams follows Sonoco Products Company (NYSE: SON), a manufacturer of paper and plastic packaging for both consumer and industrial use. SON appears to have a dividend policy of recognizing
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

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