An investor gathers the following data about a

Question
26 of 30
An investor gathers the following data about a company:
Most recent year’s dividend per share $1.47
Next year’s estimate of earnings per share $4.00
Estimate of long-run return on equity (ROE) 15%
Estimate of long-run dividend payout ratio 40%
Investors’ required rate of return 12%
The company’s justified forward P/E is closest to:
10.0.
20.0.
13.3.
Correct.
Justified forward P/E: P
0
/ E
1
= p /( r –
p = Payout ratio = 40% (given); r = Required rate of return = 12% (given)
g = (1 – Dividend payout ratio) × ROE = (1 – 0.40) × 15 = 9%.
P
0
/E
1
= p / (r – g) = 0.40 / (0.12 – 0.09) = 13.3×.
Alternatively:
Justified forward P/E: P
0
/ E
1
= ( D
1
/ E
1
)/( r – g
g = (1 – Dividend payout ratio) × ROE = (1 – 0.40) × 15 = 9%.
D
1
= $1.47 × 1.09 = 1.60; E
1
= $4.00 (given); r = Required rate of return = 12% (given).
P
0
/ E
1
= ( D
1
/ E
1
)/( r – g ) = (1.60/4.00)/(0.12 – 0.09) = 13.3×
g )
)
CFA Level I
“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox
Section 5.1
Question
27 of 30
An investor gathered the following data:
Par value of preferred stock offered with a 6% dividend rate $100
Company’s sustainable growth rate 5%
Yield on comparable preferred stock issues 11.5%
Investor’s marginal tax rate 30%
The value of the company’s preferred stock is closest to:

Correct.
CFA Level I
“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox
Section 4.1
Question
28 of 30
A company’s series B, 8% preferred stock has the following features:
 A par value of $50 and it pays quarterly dividends.
 Its current market value is $35.
 The shares are retractable (at par) with the retraction date set for three years from
today.
 Similarly rated preferred issues have an estimated nominal required rate of return of
12%.
 Analysts expect a sustainable growth rate of 4% for the company’s earnings.
The intrinsic value estimate of a share of this preferred issue is closest to:
CFA Level I
“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox
Section 4.1
Question
29 of 30
An investor gathers the following information about a company:
Current dividend per share $3
Historical annual dividend growth rate 4%
Expected annual dividend growth rate for the next three years 8%
Expected stock value per share at the end of Year 3 $33