Exam 9: The Top-Down Approach to Market, Industry, and Company Analysis

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. Because 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 9.4. To what price will the market rise if the earnings expectation is $10.00?

A growth company can invest in projects that generate a return greater than the firm's

Which of the following is NOT a major variable that affects the aggregate stock market earnings multiplier in a country?

The initial effect of a change in monetary policy appears in ____ and only later in ____.

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. Because 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 9.1. What is the expected sustainable growth rate?

If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you would expect stock prices to

One of the economic series included in the Conference Board coincident indicator is the index of industrial production.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following information on Kayray Corporation. Your ultimate objective is to calculate the EVA for the firm. -Refer to Exhibit 9.15. Calculate the dollar cost of capital.

The growth rate will most likely increase if the

The dividend payout ratio for the aggregate market is 55 percent, the required rate of return is 15 percent, and the expected growth rate for dividends is 7 percent. Compute the current earnings multiple.

Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows.

Underpriced stocks can be ranked using the excess return ratio, which is calculated as the Market price/Risk free rate.

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. -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.

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?

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 9.5. Calculate the firm's ROE.

A growth company is one that has the ability to

In Berkshire Hathaway annual reports, Warren Buffet highlights financial tenets that he believes are important. Which of the following is NOT a financial tenet of Warren Buffet?

Speculative companies are firms in which

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12 percent, and an expected growth rate for dividends of 4 percent. -Refer to Exhibit 9.9. What is the current earnings multiplier?

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. Assuming that you expect the stock price to increase to $42 during the investment period, your expected rate of return and decision would be