PROBLEM C

Attention : Please answer all problems in PROBLEM C with theright and short explanation, explain by using the formula (ifneeded).

A. A firm can have a high trailing PIE ratio, yet have a lowexpected earnings growth rate in

the future. Is this so ?

B. For a firm with a normal trailing PIE ratio, expectedfuture residual earnings must be the

same as current residual earnings. Correct ?

C. Does an increase in financial leverage increase or decreasethe (levered) P/E ratio ?

D. Wall Street analyst predicted in 2009 (1 year after crisis2008) that, after the considerable

deleveraging during the financial crisis, firms would beginonce again to lever up with

more borrowing. "They must defend their return on equity," heclaimed. As a result,

"investors should look for a rise in dividends and sharebuy-backs and an expansion of PIE

multiples, leading to equity market outperformance." Is hecorrect ?

E. The higher the anticipated return on net operating assets(RNOA) relative to the anticipated

growth in net operating assets, the higher will be theunlevered price to book ratio. Is this

correct ?