Question 1

The dividend payout ratio for the aggregate market is 50 percent,the required rate of return is 16 percent,and the expected growth rate for dividends is 6 percent.Compute the current earnings multiple.

Accepted Answer

P/E = Payout ¸ (k - g)= .50 ¸ (.16 - .06)= 5

Question 2

Exhibit 12.1
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.1.What is your expectation of the market P/E ratio?

Accepted Answer

P/E = Payout ¸ (k - g)= .65 ¸ (0.15 - .042)= 6.02

Question 3

The dividend payout ratio for the aggregate market is 65 percent,the required rate of return is 12 percent,and the expected growth rate for dividends is 6 percent.Compute the current earnings multiple.

Accepted Answer

P/E = Payout ¸ (k - g)= .65 ¸ (0.12 - .06)= 10.83

Question 4

The dividend payout ratio for the aggregate market is 65 percent,the required rate of return is 13 percent,and the expected growth rate for dividends is 8 percent.Compute the current earnings multiple.

Accepted Answer

P/E = Payout ¸ (k - g)= .65 ¸ (.13 - .08)= 13

Question 5

Exhibit 12.1
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.1.To what price will the market rise if the earnings expectation is $22.00 per share?

Accepted Answer

P = P/E × EPS = 6.02 × 22.00 = $132.41

Question 6

Exhibit 12.5
Use the Information Below for the Following Problem(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 12.5.Calculate the firm's ROE.

Accepted Answer

ROE = (0.15)(2)(1.2)= 0.36 = 36%

Question 7

Exhibit 12.2
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.2.What is your expectation of the market P/E ratio?

Accepted Answer

P/E = Payout ¸ (k - g)= .75 ¸ (0.15 - .048)= 6.25

Question 8

Exhibit 12.3
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent.
-Refer to Exhibit 12.3.What is your expectation of the market P/E ratio?

Accepted Answer

P/E = Payout ¸ (k - g)= .55 ¸ (0.07 - .0585)= 47.82

Question 9

Exhibit 12.4
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 16 percent return. The return on equity will be 14 percent.
-Refer to Exhibit 12.4.What is your expectation of the market P/E ratio?

Accepted Answer

P/E = Payout ¸ (k - g)= .45 ¸ (0.16 - .077)= 5.42

Question 10

Exhibit 12.2
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.2.What is the expected sustainable growth rate?

Accepted Answer

g = (1 - Payout)× (ROE)= 0.25 × .12 = 3%

Question 11

Exhibit 12.6
Use the Information Below for the Following Problem(S)
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company.
 $\begin{array}{lrr}
\begin{array}{l}
\
\
\text{GDP}\
\text{GDP growth}\
\text{Sales per share}\
\text{Operating profit margin}\
\text{Depreciation/Fixed Assets}\
\text{Fixed asset turnover}\
\text{Interest rate}\
\text{Total asset turnover}\
\text{Debt/Total assets}\
\text{Tax rate}\
\end{array}\
\begin{array}{r}
\
\text{Year 2003}\
\hline
\text{11,000 Billion}\\
 \$ 800 \\\\\\\\
\end{array}\
\begin{array}{r}
Estimated\
\text{Year 2004}\
\hline\ 3.5 \% \\
 12 \% \
 14 \% \
2\
3.5 \% \
 0.7 \
45 \% \
36\%
\end{array}\
\end{array}$ 
In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is
%D Sales per share = 0.015 + 0.75(%∆GDP)
-Refer to Exhibit 12.6.Calculate GDP for the year 2004.

Accepted Answer

The GDP growth rate is 3.5%. Therefore, the GDP for 2004 is calculated as $11,000 billion * (1 + 0.035) = $11,385 billion.

Question 12

Exhibit 12.1
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.1.What is the expected sustainable growth rate?

Accepted Answer

g = (1 - Payout)× (ROE)= 0.35 × 12 = 4.2%

Question 13

Exhibit 12.5
Use the Information Below for the Following Problem(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 12.5.Calculate the P/E multiple.

Accepted Answer

P/E = 0.75/(0.14 - .09)= 15

Question 14

Exhibit 12.4
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 16 percent return. The return on equity will be 14 percent.
-Refer to Exhibit 12.4.To what price will the market rise if the earnings expectation is $10.00?

Accepted Answer

P = P/E × Earnings = 5.42 × 10.00 = $54.20

Question 15

Exhibit 12.5
Use the Information Below for the Following Problem(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 12.5.Calculate the firm's estimated share price.

Accepted Answer

P = (2.5)(15)= $37.5

Question 16

Exhibit 12.3
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent.
-Refer to Exhibit 12.3.What is the expected sustainable growth rate?

Accepted Answer

g = (1 - Payout)× (ROE)= 0.45 × 13 = 5.85%

Question 17

Exhibit 12.5
Use the Information Below for the Following Problem(S)
An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available:
Estimated profit margin = 15%
Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
-Refer to Exhibit 12.5.The firm's sustainable growth rate is

Accepted Answer

g = (1 - 0.75)(0.36)= 0.09 = 9%

Question 18

Exhibit 12.2
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
-Refer to Exhibit 12.2.To what price will the market rise if the earnings expectation is $32.00?

Accepted Answer

P = P/E × EPS = 6.25 × 32.00 = $200

Question 19

Exhibit 12.4
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 45 percent when the rate on long term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 16 percent return. The return on equity will be 14 percent.
-Refer to Exhibit 12.4.What is the expected sustainable growth rate?

Accepted Answer

g = (1 - Payout)× (ROE)= 0.55 × 14 = 7.7%

Question 20

Exhibit 12.3
Use the Information Below for the Following Problem(S)
Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent.
-Refer to Exhibit 12.3.To what price will the market rise if the earnings expectation is $1.5?

Accepted Answer

P = P/E × EPS = 47.82 × 1.5 = $71.74

Quiz 12: Macroanalysis and Microvaluation of the Stock Market

The dividend payout ratio for the aggregate market is 50 percent,the required rate of return is 16 percent,and the expected growth rate for dividends is 6 percent.Compute the current earnings multiple.

The dividend payout ratio for the aggregate market is 65 percent,the required rate of return is 12 percent,and the expected growth rate for dividends is 6 percent.Compute the current earnings multiple.

The dividend payout ratio for the aggregate market is 65 percent,the required rate of return is 13 percent,and the expected growth rate for dividends is 8 percent.Compute the current earnings multiple.