F08fin Solutions to Chapter 1 Problems rev D

F08fin Solutions to Chapter 1 Problems rev D - Solutions to...

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Solutions to Chapter 1 Problems VALUATION HANDBOOK by Lloyd A. Levitin Marshall School of Business University of Southern California Copyright 2008 by Lloyd A. Levitin. All Rights Reserved. No part of this document may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the author.
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Chapter 1 Problem 1 A. A higher ROE increases the value of a firm’s stock. What are the three ways managers can increase ROE? 1. Generate more income per dollar of sales (increase net income margin) 2. Generate more sales per dollar of assets (increase turnover) 3. Create more debt per dollar of assets (increase leverage) if benefits from additional debt not wiped out by increased risk of financial distress. B. Is it a valid financial goal to maximize ROE? Why or why not? No. It can lead to rejecting projects that have a ROE lower than company wide average even though the ROE exceeds Ke. Problem 2 Supreme Products has a long term expected ROE of 12%, a cost of equity of 10%, an expected long term growth rate of 5%. The book value per share is $20. Calculate its per share value and its warranted price/book ratio. V = BVE
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F08fin Solutions to Chapter 1 Problems rev D - Solutions to...

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