Exam 11: Equity Valuation Models

A firm has a dividend payout ratio of 20%,annual profit of $20 000 and a market value of equity equal to $150 000.Given a corporate tax rate of 30%,estimate the growth rate in dividends.

MAB Ltd has just announced its latest dividend at $0.60 per share.If MAB has a constant expected growth rate of 5% and a cost of capital of 7%,which of the following is the best estimate of the value of MAB Ltd's shares?

An investor expects Gernotti Ltd to pay a dividend of $0.80 next year,after which the investor will sell the share for $9.00.If the cost of capital is 12% p.a. ,what is the current price of the share?

Grott and Perrin,Inc.has expected earnings of $3 per share for next year.The firm's ROE is 20%,and its earnings retention ratio is 70%.If the firm's cost of capital is 15%,what is the present value of its growth opportunities?

The consistent use of real or nominal figures in the calculation of share prices has an enormous effect on the valuation.

Riskinfoz Ltd currently pays a dividend of $1.30.Riskinfoz Ltd's estimated growth rate is 14.8%.What is the expected dividend in Year 9?

An investor expects Chewy Lewy Ltd to pay a dividend of $0.95 next year,after which the investor expects to sell the share for $12.80.The cost of equity capital is estimated to be 12% p.a.What is the present value of one share in Chewy Lewy Ltd?

Generally speaking,the higher a firm's ROA (return on assets),the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.

Lessitz Ltd currently pays a dividend of $0.85.Lessitz Ltd's estimated growth rate is 6.8%.Given a cost of capital of 9.00%,what is the PV of one share in Lessitz Ltd?

You work for an arm of a major merchant bank specialising in Australian equity stocks.It is company policy to use the earnings capitalisation model for valuation purposes and to calculate EPS forecasts using two approaches;one a random walk (RW)and the other a random walk with $0.05 drift (RWD).The EPS for PF Corporation is currently $0.25,and in the previous year EPS was $0.25.PF Corporation has a current share price of $4.25 and a cost of capital of 12%.Which of the following best represents your recommendation about PF Corporation under each approach?

Assume that the current earnings per share of Uschi Ltd is $0.57.Uschi Ltd is not expected to experience any growth.The company has an estimated cost of capital of 15.75%.What is the PV of Uschi Ltd shares?

The correct strategy for dealing with a security where its price is greater than its value is to short sell the share.

Most firms exhibit constant rates of growth in their dividend series.

An investor expects Tom Fun Ltd to pay a dividend of $0.40 in year 1,$0.75 in year 2 and $.80 in year 3,after which the investor expects to sell the share for $8.95.The cost of equity capital is estimated to be 13.50% p.a.What is the present value of one share in Tom Fun Ltd?

If shares in Ursula Ltd are currently trading at a P/E ratio of 12.4,what is the implied cost of capital?

Brown and Clarke (1993)generally find evidence that investors in the Australian market assign a negative value to the imputation tax credit on ex-dividend dates.

Assume Luna Ltd pays a mixture of both franked and unfranked dividends.The current dividend just paid is $0.80,of which 40% is franked.The expected constant growth rate is 5% and the estimated cost of capital is 9%.Given a corporate tax rate of 30%,what is the present value of one share in Luna Ltd?

You work for an arm of a major merchant bank specialising in Australian equity stocks.It is company policy to use the earnings capitalisation model for valuation purposes and to calculate EPS forecasts using two approaches: a random walk (RW)and a random walk with $0.05 drift (RWD).The EPS for PF Corporation is currently $0.35,and in the previous year the EPS was $0.32.PF Corporation has a current share price of $4.70 and a cost of capital of 7%.Which of the following best represents your recommendation about PF Corporation under each approach?

If Minion Ltd has a price of $47.50 and current EPS of $3.50,what is Minion's cost of capital?

You work for an arm of a major merchant bank specialising in Australian equity stocks.It is company policy to use the earnings capitalisation model for valuation purposes and to calculate EPS forecasts using two approaches;a random walk (RW)and a random walk with $0.05 drift (RWD).The EPS for PF Corporation is currently $0.50,and in the previous year EPS was $0.52.PF Corporation has a current share price of $5.60 and a cost of capital of 8%.Which of the following best represents your recommendation about PF Corporation under each approach?