CHAPTER 12—MACROANALYSIS AND MICROVALUATION OF THE

STOCK MARKET

TRUE/FALSE

1. A main limitation of the NBER indicator series is false signals.

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2. Stock prices move coincidentally with the economy.

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3. The cyclical indicator approach to market analysis is based on the belief that the economy expands and
contracts in a random manner.

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4. Leading indicators of the business cycle include economic series that reach peaks or troughs before the
peaks and troughs of the overall economy.

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5. Coincident indicators include economic time series that have peaks and troughs that roughly occur at
the same time as the peaks and troughs of overall economic activity.

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6. The economy and the stock market have a strong, consistent relationship, but the stock market
generally turns before the economy does.

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7. Diffusion indexes indicate the spread in interest rates between major economies.

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8. The economic factor assumed to be closely related to stock prices is productivity.

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9. The best known monetary variable is the level of taxes.

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10. Recent studies show that money supply changes have an important impact on stock price movements.

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11. Recent studies indicate that one can earn excess returns in the stock market by forecasting
unanticipated changes in the money supply.

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12. The first step in the Goldman Sachs analysis of world markets examines a country's aggregate
economy and its components that relate to the valuation of securities.

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13. The Goldman Sach analysis recommends an allocation of equity investments among countries in
comparison to the country's normal weighting based on its relative market value.

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14. It is important to analyze the economies and security markets before analyzing alternative industries or
companies.

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15. Over the last 20 years, increases in the return on equity for the S&P Index has been associated with
decreases in return of assets.

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16. It is more important to estimate future earnings than the future earnings multiplier.

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17. An analysis of U.S. equity markets using the cash flow techniques concludes that the market is not
fully valued.

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18. There is a negative relationship between the capacity utilization rate and the profit margin.

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19. Estimating net profit margin directly is difficult because it is so volatile.

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20. An increase in the required rate of return k will increase the P/E ratio.

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21. Future tax rates are difficult to estimate because they are politically influenced.

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22. As the market's return on equity increases so will the P/E ratio.

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23. It is reasonable to expect corporate sales to be closely related to GNP.

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Changes in the dividend payout ratio are positively related to changes in the retention rate. ANS: F PTS: 1 30. When estimating a major stock market value using the earnings multiplier approach near-term estimates of the required rate of return and growth rate are essential due to the impact of near-term events on cash flows. The University of Michigan Consumer Sentiment Index is an example of a leading indicator.S. An increase in the retention ratio will cause a decrease in the growth rate. ANS: F PTS: 1 28. ANS: F PTS: 1 27. Building permits for new private housing units are listed as a leading indicator by the National Bureau of Economic Research (NBER). .24. ANS: T PTS: 1 35. since the U. ANS: F PTS: 1 34. ANS: T PTS: 1 31. In well developed economies. ANS: T PTS: 1 25. The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation methods. One of the economic series included in the National Bureau of Economic Research (NBER) coincident indicator is the index of industrial production. Dividend growth is positively related to the return on equity. ANS: T PTS: 1 29. stock market is inefficient. The valuation techniques presented in the chapter can only be applied to the stock market in the United States. ANS: F PTS: 1 32. A major advantage of the cyclical indicator approach is that it spans all important major economic sectors including the service sector and import-exports. ANS: T PTS: 1 33. 10-year Treasury bonds less federal funds. is listed as a lagging indicator in the National Bureau of Economic Research (NBER). Interest rate spread. markets are not affected by changes in expected inflation. ANS: F PTS: 1 26.

Changes in the risk premium c. ANS: F PTS: 1 MULTIPLE CHOICE 1. If a diffusion index for new orders went from 87 to 74 and then to 68. Percent Face Value c. increase . New Building Permits ANS: A PTS: 1 OBJ: Multiple Choice 5. M2 money supply. weakening. Coincident indicators c. Dow Jones Industrial Average b. M2 Money Supply. ANS: D PTS: 1 OBJ: Multiple Choice 2. Index of industrial production. Industrial production b. Deflated e. Which of the following are not cyclical indicators? a. except: a. the federal deficit and military contract awards are ____ of aggregate economic activity. Lagging indicators d. balance of payments. Limited. The index of leading indicators includes all of the following. Selected series b. S & P 500 index. c. e. Changes in the sensitive materials price. The U. Inflation ANS: C PTS: 1 OBJ: Multiple Choice 6. Twists in the yield curve e. Lagging indicators ANS: C PTS: 1 OBJ: Multiple Choice 3. Leading indicators b. it would indicate ____ receipt of new orders and indicate a ____ in breadth and the possibility of a future ____ in the series. Not indicators ANS: D PTS: 1 OBJ: Multiple Choice 4. Dow Jones Bond Prices. Which of the following series does not include the long-leading index? a. Not categorized indicators e. Diffusion indicators d.S. Which of the following variables was considered not significant in explaining stock returns? a. strengthening. decline b. Price to Unit Labor Cost d. Leading indicators e. b. a. Coincident indicators c. Orders for plant and equipment. d. a. Consumption d. Limited.

decreasing. The year-to-year percentage change in the M1 money supply less the year-to-year percentage. and Japan is ____ and ____. The Securities and Exchange Commission (SEC) b." b. b. Comparison with previous cycles ANS: D PTS: 1 OBJ: Multiple Choice 9. b. trying to include a number of ideas in their forecasts. All of the above ANS: C PTS: 1 OBJ: Multiple Choice 11. e. The year-to year percentage change in the M2 money supply less the year-to-year percentage change in the nominal GNP. Widespread. all are reasons cited for why forecasters are often incorrect) ANS: D PTS: 1 OBJ: Multiple Choice ." that is. c. decline e. Widespread. a. Low. d. Excess liquidity is defined as a. None of the above (that is. e. There is a temptation for economic forecasters to stay fairly close to the "norm. Diffusion indexes b. e. Direction of change d. increase d. weakening. Many analysts are simply too short-sighted. weakening. Widespread. High. Rates of change c. increase ANS: D PTS: 1 OBJ: Multiple Choice 7. Which of the following is not normally associated with cyclical indicators? a. remaining constant. d. Ratios among series e. ANS: C PTS: 1 OBJ: Multiple Choice 8.S. c. decreasing. Which of the following is not a reason given for why forecaster are so often incorrect? a. The National Bureau of Economic Research (NBER) c. strengthening. d. increasing. Some economic forecasters are too broad-minded. increasing. Low. High. Which of the following is not an analytical measure used by the NBER to examine behavior within a series? a. "group think. Center for International Business Cycle Research (CIBCR) e. c. Business Week d. Economists and economic forecaster often suffer from information overload. Low. The growth rate in M2 money supply less the growth rate in M1 money supply. The correlation of stock market returns between the U. c. None of the above ANS: D PTS: 1 OBJ: Multiple Choice 10. The year-to-year percentage change in the "real" GNP less the year-to-year percentage change in the nominal GNP.

Employees on nonagricultural payrolls. and that stock prices turn before the economy does. c. Which of the following economic series are included in the NBER coincident indicator group? a. Consumer expectations. Which of the following statements concerning asset allocation is false? a. and that stock prices turn after the economy does. ANS: A PTS: 1 OBJ: Multiple Choice 17. Average weekly hour of production workers. ANS: C PTS: 1 OBJ: Multiple Choice 14. and that stock prices turn before the economy does. ANS: D PTS: 1 OBJ: Multiple Choice 16. b. coincident. b. c. d. Which of the following economic series are included in the NBER lagging indicator series? a. coincident. Strong. and that stock prices turn after the economy does. d. Leading. and lagging. M2. leading.12. Manufacturing and trade sales data in 1992 dollars. Leading. ANS: D PTS: 1 OBJ: Multiple Choice 15. and consumer expectations. Which of the following economic series are included in the NBER leading indicator group? a. None of the above (that is. Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels. a. ANS: C PTS: 1 OBJ: Multiple Choice 13. Weak. Severe currency blockages should not impact global diversification selections. c. d. d. Manufacturers' new orders. d. coincident. Vendor Performance. The National Bureau of Economic Research (NBER) has derived the following indicator series in order to monitor business cycles. b. b. and lagging. e. c. b and c. Leading. and lagging. . d. Weak. Diversification across international boundaries can improve risk-adjusted portfolio returns. Change in consumer price index for services. all statements are true). b. non-defense capital goods. Average weekly initial claims for unemployment insurance. Index of bond prices. b. Nonexistent. and M2. Index of consumer expectations. Index of stock prices. c. Strong. c. e. An examination of the relationship between stock prices and the economy has shown that the relationship is a. Index of industrial production. a and b. e. Spread of 10-year Treasury yield less fed funds. e. Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio. leading. e.

Decline. d. ANS: B PTS: 1 OBJ: Multiple Choice 19. Neutral. Stock markets. Decline. Rise and then decline. d. There are three techniques available to help an investor make a market decision. ANS: D PTS: 1 OBJ: Multiple Choice 21. bond markets. The aggregate economy. ANS: C PTS: 1 OBJ: Multiple Choice 20. then you would expect stock prices to a. Rise. c. Fundamental analysis that considers the effect of market on the entire portfolio. e. the aggregate economy. Technical analysis where an investor analyzes past and recent market movements for indications of future performance. None of the above. Micro techniques that estimate future market values by applying one of several basic valuation models to equity markets. c. b. Easy. stock markets. If interest rates rise due to inflation. and expected cash flows to a firm rise. Tight. Jensen. The initial effect of a change in monetary policy appears in ____ and only later in ____. Remain unchanged. a. d. ANS: C PTS: 1 OBJ: Multiple Choice 22. b. Remain unchanged. financial markets. Macro techniques that are based on the strong relationship between the economy and security markets. Rise and then decline. but expected cash flows to a firm do not change. e. Rise. all are techniques available to make market decisions) ANS: D PTS: 1 OBJ: Multiple Choice . Average duration of unemployment in weeks. None of the above. b. e. d. d. c. ANS: E PTS: 1 OBJ: Multiple Choice 18. None of the above. None of the above. All of the above. e. and Mercer showed that the relationship between stock returns and size and price-to- book ratio holds in periods when monetary policy is a. b. If interest rates increase due to inflation. c. Financial markets. c. Which of the following is not such an analysis technique? a. Bond markets. e. Johnson. None of the above (that is. b. e. then you would expect stock prices to a.

Financial leverage e. c. The profit margin for the S&P Industrials Index. Expected earnings per share estimates requires all of the following except a. b. A GDP estimate. Capital expenditure c. A tax rate estimate. e. Corporate business risk. the required rate of return on common equity. The earnings multiplier for common stock. ANS: C PTS: 1 OBJ: Multiple Choice 28. ANS: D PTS: 1 OBJ: Multiple Choice 25. e. d. Return on equity. d. Depreciation expense b. c. Required return b. c. e.23. Profit margins increase. c. Net profit margin ANS: A PTS: 1 OBJ: Multiple Choice . The growth rate (g) of dividends is affected by all of the following except a. b. d. ANS: B PTS: 1 OBJ: Multiple Choice 26. Capital gains tax revenues. Principal debt repayment e. The economy's risk free rate. All of the above. An aggregate operating profit margin estimate d. Expected rate of inflation. Change in working capital d. A sales per share estimate. b. The dividend payout ratio. Equity turnover decreases. Aggregate tax revenues. b. Which of the following is not a factor under the Free Cash Flow to Equity (FCFE) Model? a. Total asset turnover increases. Aggregate GDP. Financial leverage increases. and the expected growth rate of stock dividends are the major variables that affect a. Retention rate c. Country risk. ANS: D PTS: 1 OBJ: Multiple Choice 27. An estimate of the real risk-free rate. All of the following factors affect the required rate of return except a. e. Earnings multiplier ANS: D PTS: 1 OBJ: Multiple Choice 24. Aggregate return on equity increases as a. Total asset turnover d.

Real money supply. Balance of payments. Growth rate of M2 money supply ANS: E PTS: 1 OBJ: Multiple Choice 31. Index of 500 consumer stock prices c. Unemployment rate d. ANS: D PTS: 1 OBJ: Multiple Choice 30. Estimating long-run required rates of return and growth rates d. d. All of the above e. Which of the following economic series is not included in the National Bureau of Economic Research (NBER) lagging indicator group? a. Which of the following economic series is not included in the National Bureau of Economic Research (NBER) leading indicator group? a. Average duration of unemployment b. Level of foreign competition e. Index of industrial production e. e. Number of employees on nonagricultural payrolls d. All of the above are included in the NBER leading indicator group ANS: D PTS: 1 OBJ: Multiple Choice 33. A microeconomic estimate of the market earnings multiple requires an estimate for which of the following variables? a. c. Dividend payout ratio b. Return on equity c. All of the above are included in the NBER lagging indicator group ANS: C PTS: 1 OBJ: Multiple Choice 34. Real RFR d. Both a and b .29. Rate of inflation c. Percentage change in the labor cost per unit of output in manufacturing e. Average weekly initial claims for unemployment b. the rate of inflation. Unit labor costs. None of the above ANS: D PTS: 1 OBJ: Multiple Choice 32. b. Aggregate gross profit margin. the level of foreign competition. Which of the following is not a determinant of the aggregate gross profit margin? a. The multiplier approach for estimating the intrinsic market value of a major stock market series requires the following step(s): a. M2 d. Aggregate net profit margin. Ratio of manufacturing and trade inventories to sales c. Estimating the future earnings per share for the stock market series b. The exchange rate. Unit labor costs of production b. Estimating the appropriate earnings multiplier for the stock market series c. Aggregate operating profit margin. and the unemployment rate were variables tested by Finkel and Tuttle as determinants of the a.

You have determined an appropriate estimate for sales per share. Composite debt to equity ratio for firms in the country e. Both a and c ANS: B PTS: 1 OBJ: Multiple Choice . Payout ratio decreases c. The growth rate will most likely increase if the: a. Required rate of return on common stock in the country b. Net income increases e. Total value of commercial loans b. Estimate the net before tax (NBT) profit margin along with a tax estimate. Which of the following is not a major variable that affects the aggregate stock market earning multiplier in a country? a. defined as earnings before interest. Base the estimate on recent trends of net profit margins. None of the above methods are appropriate. Industrial production e. Manufacturing and trade sales ANS: A PTS: 1 OBJ: Multiple Choice 38. Rate of inflation e. Personal income less transfer payments d. Expected growth rate of dividends for the stocks in the country c. Which of the following methods can be used to estimate the profit margin? a. taxes. All of the above methods are appropriate. You are attempting to estimate expected earnings per share for a major stock market series. Capacity utilization rate b. Variable labor costs d. All of the above ANS: E PTS: 1 OBJ: Multiple Choice 35. ANS: D PTS: 1 OBJ: Multiple Choice 36. Unit labor costs c. c. Employees on nonagricultural payrolls c. and depreciation. Return on equity decreases d. A 1971 study by Finkel and Tuttle hypothesizes that all of the following variables affect the aggregate profit margin except a. d. Composite dividend-payout ratio for common stocks in country d. Foreign competition ANS: C PTS: 1 OBJ: Multiple Choice 37. Incorporate an estimate an operating profit margin. Which of the following economic series is not included in the National Bureau of Economic Research (NBER) coincident economic indicator group? a. b. e. e. All of the above are major variables for a country's aggregate stock market earnings multiplier ANS: D PTS: 1 OBJ: Multiple Choice 39. Retention ratio decreases b.

the profit margin was 0.00% ANS: C ROE = (Profit Margin)  (Equity Turnover) = (0.35)(10) = 3. If. 28. If.300% c. to change except a.5 PTS: 1 OBJ: Multiple Choice Problem 42.026% b. 26. for the S&P Industrials Index. 0. 333.00% ANS: B ROE = (Profit Margin)  (Equity Turnover) = (0.033% b. 0.00% e. 3. k.48% c. 3. 2. Changes in the retention rate c.70% e. for the S&P Industrials Index.20 and the equity turnover ratio was 13. 35. 33.35 and the equity turnover ratio was 10.3 PTS: 1 OBJ: Multiple Choice Problem 43.500% d.25)(12) = 3.600% c.83% b. Changes in the rate of inflation d.500% d.00% .57% e. the ROE would be: a. 2.857% c. 3. the ROE would be: a. the profit margin was . Changes in the real risk free rate b. for the S&P Industrials Index.25 and the equity turnover ratio was 12. If.035% b.30 and the equity turnover ratio was 11.00% d. All of the above changes will cause a change in the required rate of return ANS: B PTS: 1 OBJ: Multiple Choice 41. When applying the earnings multiplier model all of the following will cause the required rate of return.30)(11) = 3. the profit margin was 0. 36. 0. Changes in the risk premium for common stock e. 30. the ROE would be: a.00% d.00% ANS: C ROE = (Profit Margin)  (Equity Turnover) = (0. the ROE would be: a. 0. If. for the S&P Industrials Index.0 PTS: 1 OBJ: Multiple Choice Problem 44. 0. 48. the profit margin was 0. 6.40.

07) = 6. 65.g) = . The dividend payout ratio for the aggregate market is 65 percent. 4.00% ANS: B ROE = (Profit Margin)  (Equity Turnover) = (0.08) = 13 PTS: 1 OBJ: Multiple Choice Problem 47.20)(13) = 2. None of the above ANS: C P/E = Payout  (k .61 e.g) = . a. a..65  (0. 6. a. Compute the current earnings multiple.83 PTS: 1 OBJ: Multiple Choice Problem 48.81 c.25 d. Compute the current earnings multiple. e. 5.93 b. 16. a.65  (. the required rate of return is 15 percent. the required rate of return is 12 percent.6 c. 7 b.15 .06) = 10.88 d. Compute the current earnings multiple.61 d. 10. None of the above ANS: D P/E = Payout  (k . and the expected growth rate for dividends is 7 percent. and the expected growth rate for dividends is 6 percent. None of the above ANS: B P/E = Payout  (k .5 .6 PTS: 1 OBJ: Multiple Choice Problem 45. 6. 5 b. and the expected growth rate for dividends is 8 percent. The dividend payout ratio for the aggregate market is 55 percent. 2.g) = . the required rate of return is 13 percent.41 b.3 e. 3. and the expected growth rate for dividends is 6 percent. The dividend payout ratio for the aggregate market is 65 percent. the required rate of return is 16 percent.13 .. 39.25 c.55  (.12 . 14. 7. 78.88 PTS: 1 OBJ: Multiple Choice Problem 46.. 13 c. Compute the current earnings multiple. The dividend payout ratio for the aggregate market is 50 percent.83 e.

80% e. None of the above ANS: A P/E = Payout  (k .26 b.33 b.33 c.25% d. The return on equity will be 12 percent. 6.06) = 5 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12.24 ANS: D P/E = Payout  (k .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.2% PTS: 1 OBJ: Multiple Choice Problem 50. $71. Since investors are becoming more risk averse. $14. What is the expected sustainable growth rate? a.02 PTS: 1 OBJ: Multiple Choice Problem 51. 5. the equity risk premium will rise to 7 percent and investors will require a 15 percent return. d.80% b.g) = .30 ANS: B P = P/E  EPS = 6. 49. $132.28 e. 4.02  22.65  (0. 2.75% ANS: B g = (1 . Refer to Exhibit 12.66 d.41 c. 5. 4 e. 8.g) = . $183.20% c. 3.15 .02 e. Refer to Exhibit 12.042) = 6. 9.. 9.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) .00 = $132..1. Refer to Exhibit 12. What is your expectation of the market P/E ratio? a.03 d.16 . To what price will the market rise if the earnings expectation is $22.35  12 = 4. $198.Payout)  (ROE) = 0.00 per share? a.1.50  (.1.41 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12. 7.

25 PTS: 1 OBJ: Multiple Choice Problem 54.2. 5.048) = 6. Refer to Exhibit 12. Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. $384. To what price will the market rise if the earnings expectation is $32.2.75 e.44 ANS: D P = P/E  EPS = 6. Since investors are becoming more risk averse. 12.g) = . The return on equity will be 13 percent. 8.75  (0. The return on equity will be 12 percent. 8. $125. 3. 6.25 c.6% ANS: D g = (1 . 6.25  . 52.00 e.15 c. 4.0% d.85 b.00 ANS: B P/E = Payout  (k . Since investors are becoming more risk averse..25 ANS: A . 6.0% b. 7.15 .00 b. the equity risk premium will rise to 8 percent and investors will require a 7 percent return.00 = $200 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12.25  32.2.33 e.3. Refer to Exhibit 12.Payout)  (ROE) = 0. 7.56 c. $266.44 d. 3.00? a.67 d. Refer to Exhibit 12.05 d.2% c. 3. Refer to Exhibit 12. 9. 55. the equity risk premium will rise to 7 percent and investors will require a 15 percent return. What is your expectation of the market P/E ratio? a.12 = 3% PTS: 1 OBJ: Multiple Choice Problem 53.3 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. $200. 6. What is the expected sustainable growth rate? a. What is the expected sustainable growth rate? a. $213.92 b.0% e.

74 d. $71. the equity risk premium will rise to 7 percent and investors will require a 16 percent return.5 = $71. 37.82  1. Since investors are becoming more risk averse. 4. 6.Payout)  (ROE) = 0. 5.g) = .36 c.3.63 d. 6. What is your expectation of the market P/E ratio? a. What is your expectation of the market P/E ratio? a.07 . 47.2 c. 24.7 ANS: E g = (1 .55  (0. $105. 7. $90.85% PTS: 1 OBJ: Multiple Choice Problem 56. g = (1 .4.3 e.14 c.3.69 b.42 b. 58. $85. The return on equity will be 14 percent.8 d. 58. Refer to Exhibit 12.30 e.7% PTS: 1 OBJ: Multiple Choice Problem 59. 5. $138.55  14 = 7. Refer to Exhibit 12.82 ANS: E P/E = Payout  (k ..74 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12. 7. 8.4.95 b. What is the expected sustainable growth rate? a. 7.Payout)  (ROE) = 0.5? a. 6.02 e. Refer to Exhibit 12. 55.92 c.25 e.45  13 = 5.0585) = 47.82 PTS: 1 OBJ: Multiple Choice Problem 57. To what price will the market rise if the earnings expectation is $1. Refer to Exhibit 12.11 ANS: A .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.14 ANS: C P = P/E  EPS = 47.42 b.15 d.

Calculate the P/E multiple. Refer to Exhibit 12. .36) = 0.40 b.42  10. $54. 36% b. Refer to Exhibit 12. Refer to Exhibit 12.10 ANS: C P = P/E  Earnings = 5.4.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) An analyst wishes to estimate the share price for Ashley Corporation.00 e.20 d.16 .09 = 9% PTS: 1 OBJ: Multiple Choice Problem 63. 8% ANS: A ROE = (0.20 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12. 25% c..36 = 36% PTS: 1 OBJ: Multiple Choice Problem 62.45  (0. 15% d.g) = .30 c. The following information is made available: Estimated profit margin = 15% Total asset turnover = 2 Financial leverage = 1. P/E = Payout  (k .5. Refer to Exhibit 12.077) = 5.42 PTS: 1 OBJ: Multiple Choice Problem 60.00? a.5.0. $66.2) = 0. $71. 8% e.75)(0. 9% d.50 61. 10% e. a. Calculate the firm's ROE. The firm's sustainable growth rate is a.2 Estimated dividend payout ratio = 75% Required rate of return = 14% Estimated EPS = $2.5. $77. 15% b. 7% ANS: C g = (1 . $51.15)(2)(1. 10% c. To what price will the market rise if the earnings expectation is $10.00 = $54.

5 b.09) = 15 PTS: 1 OBJ: Multiple Choice Problem 64.500 billion b.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. $11. Calculate GDP for the year 2004. Refer to Exhibit 12.5% Sales per share $800 Operating profit margin 12% Depreciation/Fixed Assets 14% Fixed asset turnover 2 Interest rate 3. 35 b.000 billion c. Refer to Exhibit 12. 15 ANS: E P/E = 0.6. a. 20 e.7 Debt/Total assets 45% Tax rate 36% 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 = 0.5 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12. 25 d. $10.5)(15) = $37.. 45 d.5 c.14 . 30 c.5% Total asset turnover 0.75(%D GDP) 65. Calculate the firm's estimated share price.015 + 0.000 Billion GDP growth 3. a.025 billion . 75 ANS: B P = (2. a.5. Estimated Year 2003 Year 2004 GDP 11. $11.550 billion e.75 e. $10. 32. 57.385 billion d. 37.75/(0. $11.

Estimate the firm's sales per share for the year 2004. $65.93 e. Estimate the firm's growth rate in sales per share.78 ANS: A FA t/o = 2.035) = 4. Sales = $833.52 Depreciation = (. 2. Dep/FA = 0. $885.6. $900. Refer to Exhibit 12.75)(. $112. 1. a. Refer to Exhibit 12. $850.6. 4.73 e. 2% c.56 d. ANS: C GDP year 2004 = (11000)(1 + . $104. $925.13% e. $99.96 PTS: 1 OBJ: Multiple Choice Problem 69.56 e.08 c.385 PTS: 1 OBJ: Multiple Choice Problem 66.14.04 FA = 833. Obtain an estimate of the per share depreciation charge for the year 2004.04 b. Refer to Exhibit 12.68 d. $75.5% b.96 ANS: E EBITDA per share = (0. $95. $833.35 c.04) = $99.015 + (.15 c.31 .12)(833. a. $102. Calculate the firm's year 2004 EBITDA per share. $58.05 b.31 b.6. Refer to Exhibit 12.04 PTS: 1 OBJ: Multiple Choice Problem 68.16% d.14)(416.0413) = $833.13% PTS: 1 OBJ: Multiple Choice Problem 67.52) = $58. 3. $53.035) = $11. a.6.03 d.73% ANS: D growth rate sales per share = . a.04/2 = 416.75 ANS: A Sales per share year 2004 = 800(1 + . $87.

65 b. a.45 Debt = (1190.10 ANS: B EBIT per share = 99. Refer to Exhibit 12. Refer to Exhibit 12.75 c.6.76 e. $393.98 e. Refer to Exhibit 12.6. $75. $1050. $35.07 d. $1113.74 PTS: 1 OBJ: Multiple Choice Problem 74. $485.72 ANS: A Debt/TA = . Calculate the firm's level of debt for the year 2004. $535.035)(535.45) = $535. Refer to Exhibit 12.58 d. a.53 b.72 c. Calculate the firm's level of Total Assets per share for the year 2004.31 = $41. PTS: 1 OBJ: Multiple Choice Problem 70.6.74 b.6. $55. $1065.67 c. a.04/0.96 . $13. $30.58. $1385. $41. Sales per share = 833. . $14.6.06)(. Calculate the per share EBIT for the year 2004.7.77 ANS: D TA t/o = 0.53) = $18. $18.65 c.06 e.53 b.59 ANS: A Interest charge = (.89 d.53 PTS: 1 OBJ: Multiple Choice Problem 73. $28. $1190. $600.06 PTS: 1 OBJ: Multiple Choice Problem 72. Refer to Exhibit 12.67 d.7 = $1190. Calculate the per share interest rate charge for the year 2004.65 PTS: 1 OBJ: Multiple Choice Problem 71. a.14 e. Calculate the firm's EBT per share for the year 2004. $65. $637.04 TA = 833.

a.89 c.918 c.91 PTS: 1 OBJ: Multiple Choice Problem 75. $18. 3. 108.390 e. 76. $15.52 c.66 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12.52 PTS: 1 OBJ: Multiple Choice Problem 77. $14. 117. 116.79 e. 120. equity market.7. 3.36) = $8. $27. Calculate the firm's EPS for the year 2004.75 d.852 b.S. 119.25 d. Refer to Exhibit 12. 3.6.91)(.00 d.S.65 .25 = $14. $12. What will FCFE be three years from now? a. $13. 2.8. $22. The beginning FCFE is $90 and the required rate of return is 10%.10)2 (1. $18.25 b. market today using the FCFE approach? a.7. 2.29 b. $19. Refer to Exhibit 12.07) = 116. What is the estimated value of the U. a.74 = $22.91 .56 e.90 b.884 ANS: D .57 ANS: B Taxes per share = (22.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are using the free cash flow to equity (FCFE) technique to analyze U. $17.91 ANS: E EBT = 41.66 c.25 EPS = 22.210 d.63 e. Free cash flows are expected to grow at a 10% rate for the next two years and then grow at a constant rate of 7% forever.21 ANS: B FCFE3 = 90(1.18. Refer to Exhibit 12.

7. 15 b. 35 ANS: B P/E = . Refer to Exhibit 12.00% b. 3. 5.8. What would the estimated value of the U. Because the economy has been slow for 5 years. 80. 25 d. 4. instead of the 10% and 7% estimates? a. you expect the dividend-payout ratio to be 55%.728 c. Refer to Exhibit 12. 3.95% d. and the dividend growth rate is 8%. Compute the current earnings multiple if the dividend payout ratio for the aggregate market is 60 percent.11 .042 ANS: C PTS: 1 OBJ: Multiple Choice Problem 79. 20 c.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As an economist for a research firm you are forecasting the market P/E ratio using the dividend discount model.. 4. Long-term government bond rates are at 6% and the equity risk premium is estimated to be 3%.08) = 20 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12. market be today using the FCFE approach. 30 e.860 d. 4. 4. if the growth rate was expected to be a constant 8% indefinitely. 4. the required rate of return is 11%.27% e. 5.05% ANS: C . PTS: 1 OBJ: Multiple Choice Problem 78.500 b.S.60/(.923 e. a.92% c. 6. What is the expected growth rate? a. Return on equity (ROE) is estimated to be 11%.

0 c.55) = . 8. Refer to Exhibit 12. a required rate of return of 12 percent.0495) = . 4. Refer to Exhibit 12.50/0.0.0405 = 13. 11.40/(0. If the payout ratio changes to 50 percent.16 c.75 d.25 e.40 P/E = payout ratio/(k .04) = 0.06 + . What is the current earnings multiplier? a.58 PTS: 1 OBJ: Multiple Choice Problem Exhibit 12. 9.25 b.g) = 0. 7.60 = .g) = 0.50/(0. Starting with the initial conditions.0495 PTS: 1 OBJ: Multiple Choice Problem 81.9. 13. 21. 7.67 ANS: D P/E = payout ratio/(k .40/0.12 .03 .9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The aggregate market currently has a retention ratio of 60 percent..9. Refer to Exhibit 12.5 ANS: B payout ratio = 1 .55/(. and an expected growth rate for dividends of 4 percent.0 e.0. but there are no other changes.8. 3.58 d.00 .17 b.33 e. g = ROE(1 . you expect the retention ratio to be constant.55/.08 = 6.08 = 5.g) = .0 PTS: 1 OBJ: Multiple Choice Problem 83. 6. Refer to Exhibit 12. and the growth rate to decline by 1 percent.. 2.11 c. 18.57 b. 10. 5. 5.payout ratio) = 0. 12.12 . the rate of inflation to decline by 2 percent.25 PTS: 1 OBJ: Multiple Choice Problem 84.04) = 0. 82.9.retention ratio = 1 .5 d. what will be the new P/E? a.. 8.42 ANS: C P/E = payout ratio/(k . What is the expected P/E? a.11(1 . What is your expectation of the market P/E ratio? a.5 b.

Starting with the initial conditions.g) = 0.retention ratio = 1 .00 ANS: D payout ratio = 1 .40/(0.03) = 0.44 PTS: 1 OBJ: Multiple Choice Problem .71 PTS: 1 OBJ: Multiple Choice Problem 85.0. What is the expected P/E? a. the rate of inflation to increase by 2 percent. Refer to Exhibit 12.71 e.71 d.. 4. 5.40/0. 5.09 = 4.retention ratio = 1 .9.00 c.40/(0.0. 6. 5.40 P/E = payout ratio/(k .60 = . 8.00 ANS: A payout ratio = 1 .14 . you expect the retention ratio to be constant. 6.67 e.40 P/E = payout ratio/(k ..40/0. c. 5.44 b. and the growth rate to increase by 1 percent.10 .07 = 5.g) = 0.05) = 0.67 d.60 = .