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Financial Markets
Financial and Economic Management

International MBA
2021

ACTIVITIES

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 FUNDAMENTAL ANALYSIS
1.- If a company is trading at 32 euros per share and market considers
that it P/E ratio is about 7.5 times, earnings per share estimated by
the market are:

a) 2.34 euros.
b) 2.43 euros.
c) 4.27 euros.
d) Nothing of the above.

PE = Price /EPS
7.5 = 32/EPS
EPS = 4.27

2.- PER for European financial sector is 12.25 times. DEUTSCHE BANK
is trading at 44.95 euros/share and has a profit per share of 3.75
euros. BANCO SANTANDER is trading at 35.85 euros and has a profit
per share of 3.20 euros. Looking a Price Earnings Ratio, which would
be your investment decision?

a) I would invest in DB because it has a higher PER, well above BS and

European financial sector.
b) I would invest in BS because it PER is above DB.
c) I would invest in DB because it PER is below the average of financial
sector.
d) I would invest in BS because it PER is below DB and below the average
for European financial sector.

PE DB = 44.95/3.75 = 11.98x
PE SANTANDER = 35.85/3.20 = 11.20x

3.- From the fundamental point of view, an analyst would be looking for,

a) A company with high P/E, low growth for earnings per share and PBV as
high as possible.
b) A company with low P/E, high growth for earnings per share and PBV as
low as possible.
c) A company with low P/E, low ROE and high PBV.
d) A company with high P/E and low Dividend Yield.

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 4.- PAYOUT for a company trading at 15 euros, with a P/E of 8 times and
a dividend yield of 1.25% is

a) 10%.
b) 15%.
c) 20%.
d) 25%.

PE = Price/EPS
8 = 15/EPS
EPS = 1.875

DY = DPS/Price
0.0125 = DPS/15
DPS = 0.1875

PAYOUT = DPS/EPS = 0.1875/1.875 = 0.10 (10%)

5.- Concerning PBV, mark the answer that you consider correct,

a) High ROE means that share is cheap.

b) PBV always will be equal or above 1.
c) There is no relationship between PBV and ROE.
d) Nothing of the above is correct.

6.- Considering the following information, determine PER for a company:

Net profit: 375 million euros

Equity: 1,950 million euros
PBV: 2.25 times
Payout: 25%

a) PER = 19.23 times.

b) PER = 11.70 times.
c) PER = 4.80 times.
d) I need more information to solve the question.

PBV = Price/Equity
Price = PBV x Equity = 2.25 x 1,950,000.000 = 4,387,5000
PE = Price/Net Profit = 4,387,5000 / 375,000,000 = 11.70x

7.- In the case of Earnings Yield Gap, inverse of P/E ratio means,

a) The number of years that it will take to recover the initial investment.
b) What you pay for each euro of profit.
c) The expected return for the equity investment.
d) It is a proxy of dividend yield.

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 8.- Using relative P/E, which of the following US banks are the most
interesting to invest in, if P/E for banking sector is 7.8x?

Company EPS Trading Price

JPMORGAN CHASE 2.65 22.30
BANK OF AMERICA 3.25 17.00
WELLS FARGO 4.35 34.40
CITIGROUP 1.60 12.30

a) JPMorgan and Wells Fargo.

b) Bank of America and Citigroup.
c) JPMorgan, Wells Fargo and Bank of America.
d) Only JPMorgan is a good investment opportunity.

Companies with the lowest PE.

9.- According to the following information, which is the PAYOUT ratio

for the company BAYER?

Stock price 34 Euros

P/E ratio 9x
Dividend yield 5.25%
Number of shares 9,500,000
Total equity 1,500,000,000 Euros

a) Around 45%.
b) Around 35%.
c) Around 25%.
d) Around 15%.

PE = Price/EPS
9 = 34/EPS
EPS = 3.777

DY = DPS/Price
0.0525 = DPS/34
DPS = 1.785

PAYOUT = DPS/EPS = 1.785/3.777 = 0.4725 (47.25%)

10.- Which is the RELATIVE P/E ratio of a company trading at 35.20

euros/share with a profit per share of 2.58 Euros if sector has a P/E of
12.75 times?

a) Relative P/E = 1.06; the stock is trading with premium.

b) Relative P/E = 0.93; the stock is trading with discount.
c) Relative P/E = 2.76; the stock is trading with premium.
d) Relative P/E = 0.36; the stock is trading with discount.

PE = 35.20/2.58 = 13.64
Relative PE = 13.64/12.75 = 1.06

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 11.- Using the Earnings Yield Gap, put in order of priority the following
equity alternatives

a) UK, Japan, US, Spain.

b) Japan, Spain, US, UK.
c) Spain, US, Japan, UK.
d) Japan, UK, Spain, US.

EYG-Spain = 1/12 – 0.0450 = 0.0383 = 3.83%

EYG-Japan = 1/9 – 0.0125 = 0.0986 = 9.86%
EYG-UK = 1/7 – 0.0575 = 0.0854 = 8.54%
EYG-US = 1/11.50 – 0.0525 = 0.0345 = 3.45%

12.- Determine P/E, Dividend Yield and ROE of a company with the
following fundamental data:

Share price: 22.35 euros

Number of shares: 625 million shares
Net profit: 1,050 million euros
Payout: 19%
Shareholders´ fund: 6,000 million euros
Total assets: 30,000 million euros

a) P/E: 12.50 times

DIVIDEND YIELD: 5.43%
ROE:12.50%.
b) P/E: 10.25 times
DIVIDEND YIELD: 1.48%
ROE:13.25%.
c) P/E: 13.30 times
DIVIDEND YIELD: 1.43%
ROE:17.50%.
d) Nothing of the above is true.

13.- P/E ratio for German stock market is 16 times and long-term yields
are at 4.5%. P/E ratio for UK market is 14 times and long yields in UK
are at 5.5%. From the earnings yield gap point of view, which market
is more attractive?

a) In German market because it EYG is 1.75%, higher than UK market.

b) In UK market because it EYG is 1.64%, below German market.
c) In German market because it EYG is -2.95%, well below UK one.
d) It´s indifferent because both EYG are the same.
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 FUNDAMENTAL ANALYSIS - SYNTEX
SYNTEX has presented quarterly results. The company has 1.050 million
of shares. It´s trading at 22.35 euros per share. Payout for the company is
at 44.50% of its net profit. Balance sheet, profit & loss account and cash
flow shows the following numbers (expressed in Million Euros):

Risk free return is 3.95% and P/E for European market is 15.30x, calculate:
P/E, PBV, PCF, DY, ROA, ROE and EYG, and give a recommendation.

Profit & Loss Account

Last Year Estimated

Total income 13.250,00 17.250,00

Cost of sales -6.350,00 -8.400,00
Margin 6.900,00 8.850,00

Staff costs -1.275,00 -1.440,00

Other expenses -1.500,00 -1.625,00
EBITDA 4.125,00 5.785,00

Amortizations -1.555,00 -1.777,00

Other expenses 160,00 0,00
Opearting income 2.730,00 4.008,00

Other income and expenses 0,00 0,00

EBIT 2.730,00 4.008,00

Financial result -650,00 680,00

Profit before taxes 2.080,00 4.688,00

Taxes -750,00 -1.400,00

Net profit 1.330,00 3.288,00

Balance Sheet

Last Year Estimated

Fixed assets 492,00 492,00

Non fixed assets 26.311,00 25.947,00
Financial assets 10.534,00 10.534,00
Account receivable 5.089,00 5.880,00
Cash 2.395,00 1.968,00
TOTAL ASSETS 44.821,00 44.821,00

Capital & reserves 8.291,00 9.514,00

Provisions 4.174,00 4.174,00
Other liabilities 9.986,00 10.464,00
Accounts payable 18.293,00 17.019,00
Short term liabilities 4.077,00 3.650,00
TOTAL LIABILITIES 44.821,00 44.821,00

Free Cash Flow 1.865,00

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 P/E = [market Price / (net profit / number shares)]

P/E = [22.35 / (3.288.000.000/1.050.000.000)] = 7.13x

Company is cheap relative to country (P/E of 7.13x versus 15.30x)

Relative P/E = 7.13 / 15.30 = 0.46 (below 1, means company cheap versus
sector or country).

PBV = [market Price / (total equity / number shares)]

Total equity = capital + reserves

PBV = [22.35 / (9.514.000.000/1.050.000.000)] = 2.47x

PBV > 1 means company expensive or positive outlook by the market. It will
depends on which is the average PBV for the sector.

PCF = [market Price / (free cashflow / number shares)]

PCF = [22.35 / (1.865.000.000/1.050.000.000)] = 12.58x

DY = [(net profit x payout / number shares) / price]

DY = [(3.288.000.000 x 44.50%/1.050.000.000) / 22.35] = 6.23%

Positive: DY is above risk-free-return.

ROE = met profit / total equity

Total equity = capital + reserves

ROE = 3.288.000.000 / 9.514.000.000 = 34.55%

Positive: ROE is well above risk-free-return.

ROA = EBIT / total assets

ROA = 4.008.000.000 / 44.821.000.000 = 8.94%

Positive: ROA is above risk-free-return.

EYG = 1/P/E – [risk-free-return]

EYG = 1/7.13 – [0.0395] = +10%

EYG > 1 means higher expected return for equities tan for fixed income
investment.

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 EQUITY VALUATION
1.- Calculate the theoretical price value of a stock paying a dividend of 5
euros next year. You expect to sell this stock at the end of next year
at a price of 110 euros. Consider that the required return for the
investment is 8%.
Price = 115 / (1 + 0.08)^1 = 106.48 euros

2.- Which is the theoretical value of a stock paying a dividend of 4 euros

during each of next two years and considering that you have
forecasted a price at the end of the second year of 75 euros. Required
return for the investment is 10%.
Price = 4 / (1 + 0.10)^1 + 79 / (1 + 0.10)^2 = 68.92 euros

3.- A company will pay next year a dividend of 7 euros and you expect a
constant annual growth of 5%. If the required rate of return is 10%,
which is the theoretical value for the company?
Price = 7 / (0.10 – 0.05) = 140 euros

4.- Calculate the constant annual growth rate (Gordon Shapiro model) of
a company with a yearly net profit of 9,500,000 euros, a shareholders
´fund of 62,250,000 euros, total assets of 84,364,000 euros and
dividends paid of 3,800,000 euros.
ROE = 9,500,000 / 62,250,000 = 15.26%
PAYOUT = 3,800,000 / 9,500,000 = 40%
g = 0.1526 x (1 – 0.40) = 9.16%

5.- According to Gordon Shapiro model, which is the theoretical value of

the following company? Is stock undervalued or overvalued?

Stock price today: 10.25 euros

Beta versus Market: 1.25
Risk free rate: 3.75%
Shareholders ´funds: 9,950 million euros
Payout: 39.40%
Number of shares: 980 millions
Expected market return: 18%
Net profit: 2,125 million euros

Dividend = 2,125,000,000 x 39.40% = 837,250,000

DPS = 837,250,000 / 980,000,000 = 0.8543

ROE = 2,125,000,000 / 9,950,000,000 = 21.36%

g = 0.2136 x (1 – 0.3940) = 12.94%

K = 3.75 + 1.25 x (18 – 3.75) = 21.56%

Price = 0.8543 / (0.2156 – 0.1294) = 9.91 euros

Stock is overvalued because market price is above theoretical price.

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 GORDON-SHAPIRO VALUATION
According to Gordon Shapiro model, which is the theoretical value of the
following company? Specify if the stock is undervalued or overvalued
related to the price today.

Stock price today 25 Euros Beta versus benchmark 0.85

Risk free rate 2.9% Total equity 9,500 million Euros
Payout 24.75% Number of shares 950 million
Expected benchmark return 14.50% Net profit 1,450 million Euros

Dividend per share:

DPS = Net profit x PAYOUT / Number of shares

DPS = 1,450,000,000 x 24.75% / 950,000,000 = 0.3777 Euros

Constant annual growth rate:

g = ROE x (1 – PAYOUT)
g = (1,450,000,000/9,500,000,000) x (1 – 0.2475) = 0.1148 >
11.48%

Required rate of return (CAPM model):

R = Risk Free Rate + Beta x (Benchmark Return – Risk Free Rate)

R = 2.9 + 0.85 x (14.50 – 2.9) = 12.76%

Theoretical Value = 0.3777 / (0.1276 – 0.1148) = 29.51 Euros

Stock in undervalued because price today is below theoretical value.

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