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business
fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

Answer true or false to the following statements, with a short explanation.a. A stock that sells for less than book value is undervalued.True ____ False ____b. If a company's return on equity drops,
NCH Corporation, which markets cleaning chemicals, insecticides, and other products, paid dividends of \($2\) per share in 1993 on earnings of \($4\) per share. The book value of equity per share was
You are analyzing the price–book value ratios for firms in the trucking industry, relative to returns on equity and required rates of return. The data on the companies is as follows:The Treasury
United Healthcare, a health maintenance organization, is expected to have earnings growth of 30% for the next five years and 6% after that.The dividend payout ratio will be only 10% during the high
Johnson & Johnson, a leading manufacturer of health care products, had a return on equity of 31.5% in 1993, and paid out 37% of its earnings as dividends. The stock had a beta of 1.25. (The Treasury
Assume that you have done a regression of PBV ratios for all firms on the New York Stock Exchange, and arrived at the following result:where Payout = Dividend payout ratio during most recent period
SoftSoap Corporation is a large consumer product firm that reported after-tax operating income of \($600\) million in a recent financial year. At the beginning of the year, the firm reported book
Lyondell Inc. is a conglomerate with a value-to-book capital ratio of 2.0. If the firm is in stable growth, expecting to grow 4% a year in perpetuity, and has a cost of capital of 10%, what return on
Estimate the value-to-book capital ratio for Zapata Enterprises, a trading firm in high growth, with the following characteristics:If high growth is expected to last 10 years, estimate the correct
If Tobin's Q is computed by dividing the market value of traded equity and debt by the book value of assets, you will overestimate the value for high-growth firms. Explain why.
Longs Drug Stores, a large U.S. drugstore chain operating primarily in Northern California, had sales per share of \($122\) in 1993, on which it reported earnings per share of \($2.45\) and paid a
You are examining the wide differences in price-sales ratios that you can observe among firms in the retail store industry, and trying to come up with a rationale to explain these differences:a.
Walgreen, a large retail drugstore chain in the United States, reported net income of \($221\) million in 1993 on revenues of \($8,298\) million. It paid out 31% of its earnings as dividends, a
Tambrands, a leading producer of tampons, reported net income of\($122\) million on revenues of \($684\) million in 1992. Earnings growth was anticipated to be 11% over the next five years, after
Gillette Inc. was faced with a significant corporate strategy decision early in 1994 on whether it would continue its high-margin strategy or shift to a lower margin to increase sales revenues in the
You have regressed price-sales ratios against fundamentals for NYSE stocks in 1994 and come up with the following regression:For instance, a firm with a 35% payout, a 15% growth rate, a beta of 1.25,
Ulysses Inc. is a retail firm that reported \($1.5\) billion in after-tax operating income on \($15\) billion in revenues in the just-ended financial year; the firm also had a capital turnover ratio
You have run a regression of value/sales ratios against operating margins for cosmetics firms:You are trying to estimate the brand name value of Estée Lauder. The firm earned \($80\) million after
You are trying to estimate the brand name value for Steinway, one of the world’s best-known piano manufacturers. The firm reported operating income of $30 million on revenues of $100 million in the
You have been asked to assess the value per share of Secure Savings, a mature savings and loan company. The company had earnings per share in the just-completed financial year of \($4\) per share and
You are now valuing the Southwest Bank, a small bank that is growing rapidly. The bank reported earnings per share of \($2\) in the just completed financial year and paid out dividends per share of
You have been asked to analyze LongLife Insurance company, a firm in stable growth, with earnings expected to grow 4% in the long term.The firm is trading at a multiple of 1.4 times book value and
Now assume that you are comparing the price-to-book ratios of the 13 largest banks in the United States in 2000. The following table summarizes the price-to-book ratios and the returns on equity
Signet Bank has asked you to estimate the value of its loan portfolio.The bank has \($1\) billion in loans outstanding, with an average maturity of six years, and expected interest income of \($75\)
Loomis Capital is a boutique investment bank that reported a return on equity of 20% on its book equity of $100 million in the justcompleted financial year. The beta for the bank is 1.20, the
Intermet Corporation, the largest independent iron foundry organization in the country, reported a deficit per share of \($0.15\) in 1993.The earnings per share from 1984 to 1992 were as follows:The
General Motors Corporation reported a deficit per share in 1993 of\($4.85,\) following losses in the two earlier years. (The average earnings per share is negative.) The company had assets with a
Toro Corporation, which manufactures lawn mowers and tractors, had revenues of \($635\) million in 1992, on which it reported a loss of \($7\) million (largely as a consequence of the recession). It
Kollmorgen Corporation, a diversified technology company, reported sales of \($194.9\) million in 1992, and had a net loss of \($1.9\) million in that year. Its net income had traced a fairly
OHM Corporation, an environmental service provider, had revenues of \($209\) million in 1992 and reported losses of \($3.1\) million. It had earnings before interest and taxes of \($12.5\) million in
You have been provided the following information on CEL Inc., a manufacturer of high-end stereo systems.In the most recent year, which was a bad one, the company made only \($40\) million in net
Tenet Telecommunications is in serious financial trouble and has just reported an operating loss of \($500\) million on revenues of \($5\) billion. The firm also had capital expenditures of \($1.8\)
Walgreen Company reported the following earnings per share from 1989 to 1994.a. Estimate the arithmetic average and geometric average growth rate in earnings per share between 1989 and 1994. Why are
BIC Corporation reported a return on equity of 20% and paid out 37%of its earnings as dividends in the most recent year.a. Assuming that these fundamentals do not change, estimate the expected growth
You are trying to estimate the expected growth in net income at Metallica Corporation, a manufacturing firm that reported \($150\) million in net income in the just-completed financial year; the book
You are trying to estimate a growth rate for HipHop Inc., a record producer and distributor. The firm earned \($100\) million in after-tax operating income on capital invested of \($800\) million
InVideo Inc. is an online retailer of videos and DVDs. The firm reported an operating loss of \($10\) million on revenues of \($100\) million in the most recent financial year. You expect revenue
SoftTech Inc. is a small manufacturer of entertainment software that reported revenues of \($25\) million in the most recent financial year. You expect the firm to grow significantly over time and
Ulysses Inc. is a shipping company with $100 million in earnings before interest and taxes that is expected to have earnings growth of 10% for the next five years. At the end of the fifth year, you
Genoa Pasta manufactures Italian food products and currently earns$80 million in earnings before interest and taxes. You expect the firm's earnings to grow 20 percent a year for the next six years
Lamps Galore Inc. manufactures table lamps and earns an after-tax return on capital of 15% on its current capital invested (which is $100 million). You expect the firm to reinvest 80% of its
Bevan Real Estate Inc. is a real estate holding company with four properties. You estimate that the income from these properties, which is currently $50 million after taxes, will grow 8% a year for
Latin Beats Corporation is a firm that specializes in Spanish music and videos. In the current year, the firm reported \($20\) million in after-tax operating income, \($15\) million in capital
Crabbe Steel owns a number of steel plants in Pennsylvania. The firm reported after-tax operating income of \($40\) million in the most recent year on capital invested of \($400\) million. The firm
How would your answers to the preceding problem change if you were told that the cost of capital for the firm is 8%?
Respond true or false to the following statements relating to the dividend discount model:a. The dividend discount model cannot be used to value a high-growth company that pays no dividends.True ____
Ameritech Corporation paid dividends per share of $3.56 in 1992, and dividends are expected to grow 5.5% a year forever. The stock has a beta of 0.90, and the Treasury bond rate is 6.25%. (Risk
Church & Dwight, a large producer of sodium bicarbonate, reported earnings per share of $1.50 in 1993 and paid dividends per share of$0.42. In 1993, the firm also reported the following:The firm
Oneida Inc, the world’s largest producer of stainless steel and silverplated flatware, reported earnings per share of $0.80 in 1993, and paid dividends per share of $0.48 in that year. The firm was
Respond true or false to the following statements relating to the calculation and use of FCFE:a. The free cash flow to equity will generally be more volatile than dividends.True ____ False ____b. The
Kimberly-Clark, a household product manufacturer, reported earnings per share of \($3.20\) in 1993 and paid dividends per share of \($1.70\) in that year. The firm reported depreciation of \($315\)
Ecolab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share of \($2.35\) in 1993, and expected earnings growth of 15.5% a year from 1994 to 1998
Dionex Corporation, a leader in the development and manufacture of ion chromography systems (used to identify contaminants in electronic devices), reported earnings per share of \($2.02\) in 1993,
Biomet Inc., which designs, manufactures, and markets reconstructive and trauma devices, reported earnings per share of \($0.56\) in 1993, on which it paid no dividends (it had revenues per share in
Will the following firms be likely to have a higher value from the dividend discount model, a higher value from the FCFE model, or the same value from both models?a. A firm that pays out less in
You have been asked to value Oneida Steel, a midsize steel company.The firm reported \($80\) million in net income, \($50\) million in capital expenditures, and \($20\) million in depreciation in the
Luminos Corporation, a manufacturer of lightbulbs, is a firm in stable growth. The firm reported net income of \($100\) million on a book value of equity of \($1\) billion. However, the firm also had
Respond true or false to the following statements about the free cash flow to the firm:a. The free cash flow to the firm is always higher than the free cash flow to equity.True ____ False ____b. The
Santa Fe Pacific, a major rail operator with diversified operations, had earnings before interest, taxes, and depreciation of \($637\) million in 1993, with depreciation amounting to \($235\) million
You have been asked to estimate the value of Cavanaugh Motels, a motel chain. The firm reported earnings of \($200\) million before interest and taxes in the most recent year and paid 40% of its
ABV Inc. has earnings before interest and taxes of \($250\) million, expected to grow 5% a year forever; the tax rate is 40%. Its cost of capital is 10%, its reinvestment rate is 33.33%, and it has
How would your answer to the previous problem change if you were told that ABV had options outstanding for 50 million shares and that each option had a value of $5?
If you were told that the average exercise price of the 50 million options in the previous problem was $6, estimate the value per share for ABV using the treasury stock approach.
LSI Logic has 1 billion shares outstanding, trading at \($25\) per share.The firm also has \($5\) billion in debt outstanding. The cost of equity is 12.5% and the cost of debt, after taxes, is 5%. If
Lava Lamps Inc. had \($800\) million in earnings before interest and taxes last year. It has just acquired a 50% stake in General Lamps Inc., which had \($400\) million in earnings before interest
Genome Sciences is a biotechnology firm that had after-tax operating income of \($300\) million last year; these earnings are expected to grow 6% a year forever, the reinvestment rate is 40%, and the
Fedders Asia Closed End fund is a closed-end equity fund that holds Asian securities with a market value of $1 billion. Over the past 10 years, the fund has earned a return of 9% a year, 3% less than
You have been asked to review another analyst’s valuation of System Logic Inc., a technology firm. The analyst estimated a value per share of\($11\) while the stock was trading at \($12.50\) per
You can compute the PE ratio using current earnings, trailing earnings, and forward earnings.a. What is the difference between the ratios?b. Which one is likely to yield the highest value and why?
An analyst has computed a ratio of firm value (which he has defined as the market value of equity plus long-term debt minus cash) to earnings after all interest expenses and taxes.a. Explain why this
The chapter noted that multiples have skewed distributions.a. What is meant by skewed distributions?b. Why do multiples generally have skewed distributions?c. What are the implications for analysts
Generally, we cannot compute PE ratios for firms that have negative earnings. What are the implications for statistics such as industry average PE ratios?
National City Corporation, a bank holding company, reported earnings per share of $2.40 in 1993, and paid dividends per share of$1.06. The earnings had grown 7.5% a year over the prior five years,
On March 11, 1994, the New York Stock Exchange Composite was trading at 16.9 times earnings, and the average dividend yield across stocks on the exchange was 2.5%. The Treasury bond rate on that date
International Flavors and Fragrances, a leading creator and manufacturer of flavors and fragrances, paid out dividends of \($0.91\) per share on earnings per share of \($1.64\) in 1992. The firm was
Cracker Barrel, which operates restaurants and gift shops, reported dramatic growth in earnings and revenues between 1983 and 1992.During this period, earnings grew from \($0.08\) per share in 1983
The S&P 500 was trading at 21.2 times earnings on December 31, 1993. On the same day, the dividend yield on the index was 2.74%, and the Treasury bond rate was 6%. The expected growth rate in real
The following were the PE ratios of firms in the aerospace/defense industry at the end of December 1993, with additional data on expected growth and risk.a. Estimate the average and median PE ratios.
The following was the result of a regression of PE ratios on growth rates, betas, and payout ratios for stocks listed on the Value Line Database in April 1993.Thus a stock with an earnings growth
Assume that you are valuing an Indonesian firm in U.S. dollars. What would you use as the riskless rate?
Explain why a six-month Treasury bill rate is not an appropriate riskless rate in discounting a five-year cash flow.
You are valuing an Indian company in rupees. The current exchange rate is Rs 45 per dollar and you have been able to obtain a 10-year forward rate of Rs 70 per dollar. If the U.S. Treasury bond rate
You are attempting to do a valuation of a Chilean company in real terms. While you have been unable to get a real riskless rate in Latin America, you know that inflation-indexed Treasury bonds in the
Assume you have estimated the historical risk premium, based on 50 years of data, to be 6%. If the annual standard deviation in stock prices is 30%, estimate the standard error in the risk premium
When you use a historical risk premium as your expected future risk premium, what are the assumptions that you are making about investors and markets? Under what conditions would a historical risk
You are trying to estimate a country equity risk premium for Poland.You find that S&P has assigned an A rating to Poland and that Poland has issued euro-denominated bonds that yield 7.6% in the
The standard deviation in the Mexican Equity Index is 48%, and the standard deviation in the S&P 500 is 20%. You use an equity risk premium of 5.5% for the United States.a. Estimate the country
The S&P 500 is at 1,400. The expected dividends and cash flows next year on the stocks in the index are expected to be 5% of the index.If the expected growth rate in dividends and cash flows over the
The Bovespa (Brazilian equity index) is at 15,000. The dividends on the index last year were 5% of the index value, and analysts expect them to grow 15% a year in real terms for the next five years.
As stock prices go up, implied equity risk premiums will go down. Is this statement always true? If not, when is it not true?
You have just run a regression of monthly returns on MAD Inc., a newspaper and magazine publisher, against returns on the S&P 500, and arrived at the following result:The regression has an R-squared
You have been asked to estimate the cost of capital for NewTel, a telecom firm. The firm has the following characteristics:There are 100 million shares outstanding, trading at \($250\) per share.The
Derra Foods is a specialty food retailer. In its balance sheet, the firm reports $1 billion in book value of equity and no debt, but it has operating leases on all its stores. In the most recent
Assume that Derra Foods, in the preceding problem, reported earnings before interest and taxes (with operating leases expensed) of $200 million. Estimate the adjusted operating income, assuming that
Food Markets Inc. is a grocery chain. It reported a book debt-to capital ratio of 10% and a return on capital of 25% on a book value of capital invested of \($1\) billion. Assume that the firm has
Zif Software is a firm with significant research and development expenses. In the most recent year, the firm had $100 million in R&D expenses. R&D expenses are amortizable over five years,
Stellar Computers has a well-earned reputation for earning a high return on capital. The firm had a return on capital of 100% on capital invested of \($1.5\) billion last year. Assume that you have
Newell Stores is a retail firm that reported \($1\) billion in revenues, \($80\) million in after-tax operating income, and noncash working capital of –\($50\) million last year.a. Assuming that
There is the possibility that the options on Merck described in the preceding problem could be exercised early.a. Use the pseudo-American call option technique to determine whether this will affect
You have been provided the following information on a three-month call:a. If you wanted to replicate buying this call, how much money would you need to borrow?b. If you wanted to replicate buying

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