1 1.) We have the following mathematical expressions for the price to book ratio (PB) and the price to earnings ratio (PE) in efficient markets. PB: VE E,(AE...) CSE CSE, A (1+r) VE+ND, 1+1 PE: 15 E(A4E...) CE CE, - (1+r) 1 a) Hence explain the determinants of PB and PE. For each of these variables, state whether it is positively or negatively related to the ratio. (3 marks) b) On the basis of your answer to part (a), explain in detail why a company might have a low PB but a high PE. Illustrate with a diagram or an example. (5 marks) You have the following information concerning Nyraria Holdings plc. CSE (the book value of equity) as at 31 March 2020 was 5,657 million; its cost of equity capital was 7.7%. Its policy is to pay dividends equal to 50% of its comprehensive income (CE). There will be no share issues or buybacks. CE and abnormal earnings for the year ended 31 March 2020 amounted to 884 million and 482 million, respectively. Comprehensive income (CE), in millions of euros, is expected to equal: Year ending 31 March 2021 2022 2023 780 890 910 c) What will be Nyraria's PE if, after 2023, abnormal earnings are expected to decline by 205 million per year until they reach zero in 2025? (7 marks) d) What will be Nyraria's PB if, after 2023, abnormal earnings are expected to decline at 10% per year forever? (7 marks) e) Returning to the strategic taxonomy: what kind of company is Nyraria? Your explanation should make reference to your results in parts (c) and (d). (3 marks) 1 1.) We have the following mathematical expressions for the price to book ratio (PB) and the price to earnings ratio (PE) in efficient markets. PB: VE E,(AE...) CSE CSE, A (1+r) VE+ND, 1+1 PE: 15 E(A4E...) CE CE, - (1+r) 1 a) Hence explain the determinants of PB and PE. For each of these variables, state whether it is positively or negatively related to the ratio. (3 marks) b) On the basis of your answer to part (a), explain in detail why a company might have a low PB but a high PE. Illustrate with a diagram or an example. (5 marks) You have the following information concerning Nyraria Holdings plc. CSE (the book value of equity) as at 31 March 2020 was 5,657 million; its cost of equity capital was 7.7%. Its policy is to pay dividends equal to 50% of its comprehensive income (CE). There will be no share issues or buybacks. CE and abnormal earnings for the year ended 31 March 2020 amounted to 884 million and 482 million, respectively. Comprehensive income (CE), in millions of euros, is expected to equal: Year ending 31 March 2021 2022 2023 780 890 910 c) What will be Nyraria's PE if, after 2023, abnormal earnings are expected to decline by 205 million per year until they reach zero in 2025? (7 marks) d) What will be Nyraria's PB if, after 2023, abnormal earnings are expected to decline at 10% per year forever? (7 marks) e) Returning to the strategic taxonomy: what kind of company is Nyraria? Your explanation should make reference to your results in parts (c) and (d)
