Question 1

Calculate the required rate of return on DCM Corporation's stock if its current price is $35 per share, next year's expected dividend is $2.00 per share, its return on equity is 12 percent, and its dividend payout ratio is 55 percent.

Accepted Answer

The answer of Calculate the required rate of return on...

Question 2

A company has sales of $220 million. These are expected to increase by 15 percent next year and 12 percent in the year after that. Over each of the next two years, the company expects to have a net profit margin of 8 percent, a payout ratio of 60 percent, and a constant 3 million shares of common stock outstanding. If the stock is expected to trade at a P/E ratio of 14 at the end of the second year and if the investor requires a 14 percent rate of return, what should the justified price of the stock be today?

Accepted Answer

The answer of A company has sales of $220 million....

Question 3

What three variables affect the P/E ratio? How does each affect it?

Accepted Answer

The answer of What three variables affect the P/E ratio?...

Question 4

In the model P/E = (D₁/E₁)/(k - g), the P/E should increase if the dividend payout rate increases, other things the same. If the payout rate was intentionally increased by the board of directors, other things are likely not to stay the same. What is likely to happen to the dividend growth rate and the required return?

Accepted Answer

The answer of In the model P/E = (D₁/E₁)/(k -...

Question 5

Upon analyzing the financial statements of Jain Industries, you discover that it is currently retaining 60 percent of its earnings (which were $6 this past year), and is experiencing a ROE of almost 20 percent. Assuming a risk-free rate of 4 percent and a risk-premium of 8 percent, how much would you be willing to pay for Jain Industries stock on the basis of the P/E ratio approach?

Accepted Answer

The answer of Upon analyzing the financial statements of Jain...

Question 6

Find the P/E ratio of a stock with a ROE of 15 percent, a book value per share of $5.00, and a current stock price of $30.00.

Accepted Answer

The answer of Find the P/E ratio of a stock...

Question 7

Given the following for Mighty Manufacturing Company:
O$\begin{array} { l l l } 
\text { Operating efficiency } & = & 0.1 \
\text { Net income } & = & \$ 50,000,000 \
\text { Net income margin } & = & 0.05 \
\text { Total asset turnover } & = & 3 \
\text { Leverage } & = & 1.5 \
\text { Retention rate } & = & 0.3
\end{array}$

(a) Calculate ROA.
(b) Calculate ROE.
(c) Find the growth rate of dividends.

Accepted Answer

The answer of Given the following for Mighty Manufacturing Company:
O\(\begin{array}...

Question 8

Internet Industries expects to earn $5.00 for the coming year, and pay a $2.00 dividend. Its ROA is 13 percent, while its leverage factor is 1.7.
(a) Calculate the expected growth rate in dividends.
(b) Given a required rate of return of 17 percent, determine the estimated price for High Tech, Inc., common stock.
(c) Calculate the expected dollar dividend two periods from now.

Accepted Answer

The answer of Internet Industries expects to earn $5.00 for...

Question 9

Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?

Accepted Answer

The answer of Can an investor that wants to use...

Question 10

Should an investor seek companies with low P/Es or high P/Es?

Accepted Answer

The answer of Should an investor seek companies with low...

Question 11

How could unexpected inflation affect the P/E ratio?

Accepted Answer

The answer of How could unexpected inflation affect the P/E...

Question 12

The risk-free rate of return is 10 percent, and the expected return for the stock market is 16 percent. Evergreen Industries has a beta of 1.1, and investors expect dividends and earnings to grow at an 8 percent rate per year. The current dividend is $1.20, and the payout ratio is 50 percent.
(a) Calculate the P/E ratio for Evergreen Industries.
(b) Estimate the price of the stock for the next year using the multiplier model.

Accepted Answer

The answer of The risk-free rate of return is 10...

Question 13

Don Jorge Shipping Inc. has net income of $40 million, total assets of $300 million, and sales of $800 million. Its equity is $190 million.
(a) Calculate ROA.
(b) Calculate ROE.
(c) If the book value per share is $7.00, what is EPS?

Accepted Answer

The answer of Don Jorge Shipping Inc. has net income...

Question 14

What is meant by "quality of earnings," and how does it affect the equity analyst's job?

Accepted Answer

The answer of What is meant by "quality of earnings,"...

Quiz 15: Company Analysis