ugba103_midterm2_solns

ugba103_midterm2_solns - UGBA 103 Midterm 2 Solutions 1...

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Unformatted text preview: UGBA 103 Midterm 2 Solutions 2008-10-29 1. Without the value from growth opportunities, the price would be negative. So we can say that PVGO > 8. 2. (a) Note that we could do this on a per-share basis or in terms of the total value of the firm. Ill do the former: PEG MSFT = P MSFT /EPS MSFT g MSFT = $21 . 96 / ($20 / 8 . 89557) . 12 = 81 . 3944655 Now we want to use MSFT as a comparable for AAPL to find P AAPL , so we set PEG MSFT = PEG AAPL and solve for the price: PEG MSFT = PEG AAPL PEG MSFT = P AAPL /EPS AAPL g AAPL P AAPL = PEG MSFT EPS AAPL g AAPL = 81 . 3944655 $5 . 08 . 8883 . 22 = $102 . 41 where weve rounded the share price to the nearest 0 . 01. 3. We know that ROE > r , where r is the market capitalization rate. If the firm permanently increases the payout ratio, it decreases the earnings retained for new investment each year. Since ROE > r , these foregone investments have positive NPV, so this decision decreases firm value, and hence decreases the stock price. 4. (a) Since ROE = r , any earnings retained (regardless of the payout ratio) are invested in projects with NPV = 0 these neither hurt or help the firms value. Hence the stock value doesnt depend on the payout ratio. (b) PV GO = 0 because ROE = r . (c) PV GO = 0, so we can value the stock based on its current earnings level: P = EPS r + PV GO = $14 . 12 + 0 = $116 . 67 5. We are being asked to explain why high P/E ratios dont necessarily mean a stock is over-valued. So what are some reasons a stock can rationally have a high P/E , i.e. that some stocks have higher P/E s than others?s than others?...
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ugba103_midterm2_solns - UGBA 103 Midterm 2 Solutions 1...

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