Miguel Garcia is updating research reports on two well-established consumer companies before first quarter 2023 earnings reports are released.

True Home is a major U.S. home builder. The home building industry is extremely cyclical; the industry was recently adversely affected by higher interest rates, rising inflation, and a decline in new home sales.

BevTown is a manufacturer and distributor of soft drinks and recently acquired a major water bottling company to offer a broader product line. The acquisition will have a significant impact on BevTowns future results.

His supervisor, Sharolyn Rittenhouse, has asked Garcia to use market-based valuations when updating the reports. Before approving Garcias work, Rittenhouse wants to discuss the calculations and choices of ratios used in the valuation of True Home and BevTown. The data used by Garcia in his analysis are summarized in Exhibit 1.

Exhibit 1: Select Financial Data for True Home and BevTown

	True Home	BevTown
2022 earnings per share (EPS)	$1.77	$3.44
2023 estimated EPS	$1.99	$3.50
Book value per share	$11.64	$62.05
Current share price	$37.23	$65.50
Sales ($ billions)	$67.44	$32.13
Shares outstanding	1,638,821,000	2,322,034,000

Garcia advises Rittenhouse that he is considering three different price-to earnings ratio (P/E) approaches to value the shares of True Home:

Approach 1-P/E using leading earnings. Approach 2-P/E using trailing earnings. Approach 3-P/E using normalized earnings.

Garcia tells Rittenhouse that he calculated the price-to-sales ratio (P/S) for True Home but chose not to use it in the valuation of the shares. Garcia states to Rittenhouse that it is more appropriate to use the P/E than the P/S because:

Reason 1-P/S does not reflect differences in cost structures among different companies. Reason 2-Earnings are less easily manipulated by accounting methods than are sales. Reason 3-Surveys show P/E ranks first among price multiples used in market-based valuation.

One of Garcias co-workers, Martina Diaz, has gathered additional data for True Home which is shown in Exhibit 2. After Garcia brings this data to Rittenhouses attention, Rittenhouse asks Garcia to also determine whether True Home is overvalued, fairly valued, or undervalued based on its justified price-to-book ratio (P/B).

Exhibit 2: Capital Market Assumptions for True Home

Beta	1.10
Equity risk premium (stocks over T-bills)	6.5%
91-day T-bill yield	4.0%
Earnings growth	7.5%

Rittenhouse provides Garcia with financial data on three close competitors for BevTown as well as the overall beverage sector in Exhibit 3. She asks Garcia to determine, based on the P/E-to-growth (PEG) ratio, whether BevTowns shares are overvalued, fairly valued, or undervalued.

Exhibit 3: Beverage Sector Data

	Forward P/E	EV/EBITDA	Forecasted EPS growth
BevTown	---	---	12.41%
Iced Green Tea Company	16.59	14.61	9.52%
Go-Go Drink Corporation	13.90	12.55	9.10%
Nature's Soda	15.64	10.43	11.94%
Beverage sector average	16.40	12.70	10.80%

Garcia agrees to perform the analysis requested by Rittenhouse, but he is concerned about the accuracy of the growth forecasts in Exhibit 3. Garcia suggests to Rittenhouse that he also calculate the enterprise value-to-EBITDA ratio (EV/EBITDA) for BevTown to cross-check the PEG ratio results. Garcia tells Rittenhouse that the EV/EBITDA approach might be useful for the following reasons:

Reason 1- EV/EBITDA is less sensitive to differences in financial leverage than is P/E. Reason 2-EV/EBITDA is easier to calculate than forward P/E. Reason 3-EV/EBITDA is the most widely used enterprise value ratio.

Rittenhouse agrees with Garcia and requests that he incorporate their discussion points before submitting the reports for final approval. Garcia has Diaz gather the additional data shown in Exhibit 4 for BevTown.

Exhibit 4: Additional Financial Data for BevTown

Depreciation and amortization	$544,780,923
Interest expense	$3,289,933,960
Taxes	$3,423,341,554
Market value of debt	$45,727,842,965
Book value of debt	$43,865,786,130
Cash and short-term investments	$5,406,097,524

Question 3 (1 point)

Garcia's preference in using the P/E over the P/S in valuing True Home is supported by all the reasons he gave except _____.

Question 3 options:

	Reason 1
	Reason 2
	Reason 3

Question 4 (1 point)

Based on the information in Exhibit 1 and for the purpose of calculating justified P/B for True Home, ROE is _____.

Question 4 options:

	15.21%
	17.10%
	17.95%