Use the following information to answer the question(s) below.
Company
Ticker
Price
per Share
Earnings
per Share
Book
Value
per Share
Abbott Labs
ABT
54.35
3.69
13.79
Bristol-Myers-Squibb
BMY
25.45
1.93
7.33
GlaxoSmithKline
GSK
41.3
3.15
6.03
Johnson & Johnson
JNJ
62.6
4.58
18.27
Merck
MRK
36.25
3.81
10.86
Pfizer
PFE
$18.30
$1.20
8.19
8) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the average P/E ratio for its
competitors, Novartis‘ stock price is closest to:
A) $13.00
B) $31.86
C) $43.47
D) $44.35
per
per
Value
per Share
Earnings
Book
3.47
GlaxoSmithKline
6.03
3.43
MRK
2.23
9) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the average price–to-book ratio
for its competitors, Novartis’ stock price is closest to:
A) $13.00
B) $22.95
C) $39.70
D) $44.35
10) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the P/E ratios for its
competitors, the highest expected stock price for Novartis is closest to:
A) $31.86
B) $44.35
C) $51.09
D) $62.60
11) Assuming that Novartis AG (NVS) has an EPS of $3.35, based upon the price–to–book ratios for its
competitors, the lowest expected stock price for Novartis is closest to:
A) $7.47
B) $13.00
C) $22.95
D) $31.86
12) You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.
If the average P/E ratio for the appliance industry sector is 17.0, the value of a share of Whirlpool stock
based upon the comparables approach is closest to:
A) $103.70
B) $27.90
C) $35.90
D) $23.10
13) You expect Whirlpool Corporation (WHR)to have earnings per share of $6.10 over the coming year.
If Whirlpool stock is currently trading at $87.00 per share, then Whirlpool’s P/E ratio is closest to:
A) 17.00
B) 13.50
C) 14.25
D) 7.00
Use the information for the question(s) below.
Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $45 million. TT also
has 5 million shares outstanding and debt of $150 million (net of cash). You believe that Oklahoma
Logistics and Transport (OLT) is comparable to TT in terms of its underlying business, but OLT has no
debt. OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7.
14) Based upon the price earnings multiple, the value of a share of Texas Trucking is closest to:
A) $49.30
B) $43.10
C) $24.15
D) $27.60
15) Based upon the enterprise value to EBITDA ratio, the value of a share of Texas Trucking is closest to:
A) $33.00
B) $82.50
C) $43.10
D) $21.25
16) What are some common multiples used to value stocks?
17) What are some implicit assumptions that are made when valuing a firm using multiples based on
comparable firms?
9.5 Information, Competition, and Stock Prices
1) Which of the following is NOT a situation where a trader is able to identify positive NPV trading
opportunities in the securities markets?
A) An investor who has access to information known only to a few investors.
B) An investor who has lower trading costs than other market participants.
C) An investor who gets up really early in the morning so he can be the first to read and act upon the
information contained in that day’s Wall Street Journal.
D) An investor who has expertise in a highly complicated area for which a company has just released
information.
2) Which of the following statements is FALSE?
A) Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows.
B) Given accurate information about any two of these variables (a firm’s future cash flows, its cost of
capital, and its share price) a valuation model allows us to make inferences about the third variable.
C) A valuation model will tell us the most about the variable for which our prior information is the least
reliable.
D) The idea that investors are able to identify positive NPV trading opportunities is referred to as the
efficient markets hypothesis.
3) Which of the following statements is FALSE?
A) Stock markets aggregate the information and view of many different investors.
B) Only in the relatively rare case in which we have some superior information that other investors lack
regarding the firm’s cash flows and cost of capital would it make sense to second-guess the market stock
price.
C) In most situations, a valuation model is best applied to tell us something about the value of the firm’s
stock.
D) The efficient market hypothesis implies that securities will be fairly priced, based on their future cash
flows, given all information that is available to investors.
4) Which of the following statements is FALSE?
A) If the profit opportunities from having private information are large, other individuals will attempt
to gain the expertise and devote the resources needed to acquire it.
B) When private information is relegated to the hands of a relatively small number of investors, these
investors may be able to profit by trading on their information.
C) When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock suggests
that they value the stock differently.
D) Since stock markets aggregate the information and view of many different investors, we expect the
stock price to react slowly to new publicly available information as the investors continue to trade until
a consensus is reached as to the new value of the stock.
Use the following information to answer the question(s) below.
Nielson Motors has a share price of $50.00. Its dividend was $2.50, and you expect Nielson Motors to
raise its dividend by approximately 6% per year in perpetuity.
5) If Nielson’s equity cost of capital is 13%, then Nielson’s expected share price is closest to:
A) $19.23
B) $37.86
C) $35.71
D) $50.00
6) Given Nielson’s current share price, if Nielson’s equity cost of capital is 13%, then Nielson’s expected
growth rate is closest to:
A) 5%
B) 6%
C) 7%
D) 8%
7) Wyatt Oil just reported that a major fire destroyed one of its oil production facilities in Colorado.
While the facility was fully insured, the loss of oil production will decrease Wyatt’s free cash flow by
$120 million at the end of this year and by $80 million at the end of next year. Wyatt has 50 million
shares outstanding and has a weighted average cost of capital of 9%. Assuming the value of Wyatt’s
debt is not affected by this event, the expected decrease in Wyatt’s stock price is closest to:
A) $2.00
B) $3.55
C) $3.87
D) $4.00
8) Vacinox is a biotechnology firm that is about to announce the results of its clinical trials of a potential
new vaccine. If the trials are successful, Vacinox stock will be worth $80 per share. However, if the trials
are not successful, then Vacinox stock will only be worth $12 per share. If on the morning that the
announcement is scheduled, Vacinox stock is trading for $60.96, then the probability that investors place
on the trials being successful are closest to:
A) 48%
B) 50%
C) 60%
D) 72%
9) Because of a catastrophic plane crash, the FAA announced that it is withdrawing its air worthiness
certification for Fly by Night Aviation’s (FBNA) new four seat private plane. As a result FBNA’s future
expected free cash flows will decline by $40 million a year for the next eight years. FBNA has 20 million
shares outstanding, no debt, and an equity cost of capital of 12%. If this news is a complete surprise to
investors, then the amount that FBNA’s stock price should fall upon the announcement is closest to:
A) $2.00
B) $16.00
C) $16.70
D) $9.90
Use the information for the question(s) below.
In a surprise announcement, NASA released details of a major contract with Lockheed-Martin (LMT)
that would increase LMT’s market value by $7.5 billion. It was widely expected by the market that this
contract would be awarded to LMT’s major competitor Boeing (BA). Assume that Boeing has 800
million shares outstanding and Lockheed Martin has 425 million shares outstanding. Prior to this
announcement, the market felt that the probability of Boeing winning the contract was 90% and that
Lockheed-Martin’s chance was only about 10%.
10) What do you anticipate will happen to Lockheed-Martin and Boeing’s stock prices are a result of this
surprise announcement?
11) What are the implications of the efficient market hypothesis for corporate managers?