Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
162. Which of the following is NOT considered a relative valuation technique?
a.
price-earnings ratio
b.
price/cash flow ratio
c.
price/book value ratio
d.
price/cost of goods sold ratio
e.
price/sales ratio
163. Which of the following is NOT considered in the price-earnings ratio technique?
a.
firm’s required rate of return on equity (k)
b.
firm’s dividend payout ratio (D/E)
c.
firm’s expected growth rate of dividends (g)
d.
All of these are correct (that is, all are components of the P/E ratio).
e.
None of these are correct (that is, none are components of the P/E ratio).
164. Evidence that a firm has high business risk would be provided by its volatile ____.
a.
b.
c.
d.
e.
165. A growth company can invest in projects that generate a return greater than the firm’s
a.
return on equity.
b.
cost of debt.
c.
cost of equity.
d.
cost of capital.
e.
return on assets.
Exhibit 9.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
(1)
The firm’s expected rate of growth of earning per share
(2)
The amount of capital invested in growth investments
(3)
The rate of return earned on the funds relative to the required rate of return
(4)
The required rate of return on the security based on its systematic risk
(5)
The firm’s dividend payout ratio
(6)
The time horizon when these growth investments will be available
166. Refer to Exhibit 9.10. In the listing above, which three factors influence the capital gain component of a growth
company?
a.
1, 3, and 5
b.
2, 3, and 4
c.
2, 3, and 6
d.
3, 4, and 5
e.
3, 4, and 6
167. Refer to Exhibit 9.10. In the listing above, which three factors influence the earnings multiple for a stock?
a.
1, 4, and 5
b.
1, 4, and 6
c.
2, 4, and 6
d.
2, 5, and 6
e.
4, 5, and 6
168. An inconsistency between a stock’s P/E ratio and growth rate can be attributed to all of the following, EXCEPT
a.
a major difference in the risk involved.
b.
inaccurate growth estimates.
c.
an undervaluation of the stock.
d.
an overvaluation of the stock.
e.
competition.
169. What is the implied growth duration of Bowe Industries given the following:
S&P Industrials
Bowe Industries
P/E Ratios
15
25
Average Growth (%)
5.0
15.0
Dividend Yield
.06
.02
a.
3.2 years
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
b.
6.6 years
c.
8.6 years
d.
9.7 years
e.
10.6 years
170. What is the implied growth duration of Casey Industries given the following:
S&P Industrials
Casey Industries
P/E Ratios
15
20
Average Growth (%)
5.0
15.0
Dividend Yield
.04
.06
a.
3.2 years
b.
2.8 years
c.
4.8 years
d.
9.6 years
e.
13.2 years
171. What is the implied growth duration of Jones Industries given the following:
S&P Industrials
Jones Industries
P/E Ratios
12
15
Average Growth (%)
6.0
10.0
Dividend Yield
.05
.03
a.
7.2 years
b.
10.9 years
c.
12.5 years
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
d.
13.9 years
e.
15.2 years
172. What is the implied growth duration of Freed Industries given the following?
S&P Industrials
Freed Industries
P/E Ratios
19
22
Average Growth (%)
11.0
16.0
Dividend Yield
.033
.08
a.
1.8 years
b.
1.3 years
c.
5.0 years
d.
4.5 years
e.
3.5 years
173. What is the implied growth duration of Howard Industries given the following?
S&P Industrials
Howard Industries
P/E Ratios
14
24
Average Growth (%)
6.0
12.0
Dividend Yield
.07
.04
a.
11.5 years
b.
16.8 years
c.
22.6 years
d.
18.4 years
e.
20.6 years
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.11
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Modular Industries currently has a 16 percent annual growth rate, while the market average is 6 percent. The market
multiple is 10.
174. Refer to Exhibit 9.11. Determine the justified P/E ratio for Modular Industries assuming Modular can maintain its
superior growth rate for the next five years.
a.
6.4
b.
13.1
c.
16.5
d.
23.8
e.
15.7
175. Refer to Exhibit 9.11. Determine the P/E ratio for Modular Industries assuming Modular can maintain its superior
growth rate for the next eight years.
a.
6.4
b.
20.5
c.
16.5
d.
23.8
e.
29.5
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.12
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Harcourt Industries currently has an 18 percent annual growth rate, while the market average is 8 percent. The market
multiple is 12.
176. Refer to Exhibit 9.12. Determine the justified P/E ratio for Harcourt Industries assuming Harcourt can maintain its
superior growth rate for the next nine years.
a.
5.98
b.
13.13
c.
21.20
d.
58.68
e.
26.65
177. Refer to Exhibit 9.12. Determine the P/E ratio for Harcourt Industries assuming Harcourt can maintain its superior
growth rate for the next three years.
a.
4.25
b.
12.50
c.
15.67
d.
30.10
e.
42.80
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
Exhibit 9.13
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Valentine Company currently has a 14 percent annual growth rate, while the market average is 4 percent. The market
multiple is 15.
178. Refer to Exhibit 9.13. Determine the justified P/E ratio for the Valentine Company assuming Valentine can maintain
its superior growth rate for the next 10 years.
a.
3.0
b.
9.2
c.
16.6
d.
28.6
e.
37.6
179. Refer to Exhibit 9.13. Determine the P/E ratio for the Valentine Company assuming Valentine can maintain its
superior growth rate for the next five years.
a.
23.7
b.
16.4
c.
15.3
d.
8.3
e.
3.8
180. Given Gitech’s beta of 1.55 and a risk-free rate of 8 percent, what is the expected rate of return assuming a 14 percent
market return?
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
a.
12.4 percent
b.
14.3 percent
c.
17.3 percent
d.
20.4 percent
e.
29.7 percent
181. The expected rate of return on Research Industries is twice the 12 percent expected rate of return from the market.
What is Research’s beta if the risk-free rate is 6 percent?
a.
2
b.
3
c.
4
d.
5
e.
6
182. Given Birdchip’s beta of 1.25 and a risk-free rate of 6 percent, what is the expected rate of return assuming a 12
percent market return?
a.
1 percent
b.
10 percent
c.
11 percent
d.
12 percent
e.
31 percent
183. The expected rate of return on Rewind Industries is 2.5 times the 12 percent expected rate of return from the market.
What is Rewind’s beta if the risk-free rate is 6 percent?
a.
2
b.
3
c.
4
d.
5
e.
6
184. Given Gilbert’s beta of 1.10 and a risk-free rate of 5 percent, what is the expected rate of return assuming a 10
percent market return?
a.
21.5 percent
b.
10.5 percent
c.
5.5 percent
d.
15.5 percent
e.
16.5 percent
185. The expected rate of return on Rooter Industries is 1.5 times the 16 percent expected rate of return from the market.
What is Research’s beta if the risk-free rate is 8 percent?
a.
2
b.
3
c.
4
d.
5
Chapter 09 – The Top-Down Approach to Market, Industry, and Company Analysis
e.
6
186. ABC Co. has paid annual dividends in the past five years of $.20, $.25, $.28, $.33, and $.36. Calculate the average
growth rate of its dividends.
a.
1.16 percent
b.
1.80 percent
c.
12.47 percent
d.
15.83 percent
e.
17.25 percent
Exhibit 9.14
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Wal-Blue
Industry
DPS
1.00
1.50
Total Asset Turnover
3.20
2.50
Net Profit Margin
3.50%
3.00%
EPS
4.00
3.00
Total Assets/Equity
3.00
4.00
187. Refer to Exhibit 9.14. What are the ROE’s for Wal-Blue and its industry?
a.
24.3% and 27.0%
b.
29.7% and 27.0%
c.
29.7% and 30.0%
d.
33.6% and 30.0%
e.
34.5% and 31.5%
188. Refer to Exhibit 9.14. What are the expected sustainable growth rates for Wal-Blue and its industry?
a.
25.2% and 15.0%
b.
30.0% and 17.5%
c.
25.2% and 17.5%
d.
27.5% and 12.5%
e.
30.0% and 15.0%
189. A firm has a current price of $40 a share, an expected growth rate of 11 percent and expected dividend per share (D1)
of $2. Given its risk, you have a required rate of return for it of 12 percent. Your expected rate of return and investment
decision is as follows:
a.
10 percent − do not buy
b.
12 percent − do not buy
c.
14 percent − buy
d.
16 percent − buy
e.
18 percent − buy