Exercise 1: Valuation by comparables You are valuing a target firm using the method of comparables. Using the comparable firms P/E ratio, you get a value of 100; using the similar firms P/B ratio, the estimate is a value of 110. a. What is your estimate of the value of the target firm? b. If the market price of the target is 102, would you invest in this stock? Explain (max page)

Exercise 2: Implied growth rate A stock index stands at 2000 at the end of the year. Next years earnings for the firms included in the index are forecasted to be 170. The current book value of equity for the same firms is 1750. Use a required rate of return of 9% and compute the long-term growth rate implied by the index level. You can assume that the long-term growth rate is constant from next year onwards.

Exercise 3: Valuation based on the Residual Earnings valuation model The following earnings and dividends forecasts were made at the end of 2022 for a firm with an $18 book value per common share at that time. The firm has a required equity return of 9%.

2023E 2024E 2025E 2026E 2027E

EPS 3.79 4.86 3.93 5.03 5.49

DPS 0.75 0.97 0.78 1 1.09

Forecast book value per share, return on common equity (ROCE), and residual earnings for 2023-2027. a. Based on your forecasts, do you think this firm is worth more or less than book value? Why? b. Assume that residual earnings will grow at a rate equal to the growth in historical GDP (4%) after 2027. What is the value of one share in the company?

Exercise 4: Discounted cash flow valuation Do you agree with the following statement? Discounted cash flow valuation does not work for companies making large investments in operations. Explain (max page)