1)Price-Earnings Model Explain the use of the price-earnings ratio for valuing a stock. Why might investors derive different valuations for a stock when using the PE method? Why might investors derive an inaccurate valuation of a firm when using the PE method? 3) Impact of Economic Growth Explain how economic growth affects the valuation of a stock 5) Impact of Inflation Assume that the expected inflation rate has just been revised upward by the market. Would the required return by investors whe invest in stocks be affected? Explain. 9) Earnings Surprises How do earnings surprises affect valuations of stocks? 15) Wall Street in the movie Wall Street, Bud Fox is a broker who conducts trades for Gordon Gekke's firm. Gekke purchases shares of firms he believes are undervalued. Various scenes in the movie offer excellent examples of concepts discussed in this chapter. a. Bud Fox comments to Gordon Gekkg that a firm's breakup value is twice its market price. What is Bud suggesting in this statement? How would employees of the firm respond to Bud's statement? b. When Bud informs Gekko that another investor, Mr. Wildman, is secretly planning to acquire a target firm in Pennsylvania, Gekko tells Bud to buy a large amount of this stock. Why? c. Gekke says, "Wonder why fund managers can't beat the S&P 500? Because they are sheep." What is Gekke's point? How does it relate to market efficiency? 1) following information over a five-year period: Average risk-free rate % 6% Average return for Crane stock X 11% Average return for Load stock x 14% Standard deviation of Crane stock returns X 2% Standard deviation of Load stock returns X 4% Beta of Crane stock X 0.8 Beta of Load stock % 1.1 Determine which stock has higher risk-adjusted returns according to the Sharpe index. Which stock has higher risk-adjusted returns according to the Treynor index? Show your work 3) Using the PE Method You found that Verta stock is expected to generate earnings of $4.38 per share this year and that the mean PE ratio for its industry is 27.195. Use the PE valuation method to determine the value of Verta shares. 8) Deriving the required Rate of Return A share of common stock currently sells for $110. Current dividends are $8 per share annually and are expected to grow at 6 percent per year indefinitely. What is the rate of return required by investors in the stock? 11) Measuring Stock Returns Suppose you bought a stock at the beginning of the year for $76.50. During the year, the stock paid a dividend of $0.70 per share and had an ending share price of $99.25. What is the total percentage return from investing in that stock over the year
