Question26 of 30An investor gathers the following data about a company:Most recent year’s dividend per share$1.47Next year’s estimate of earnings per share$4.00Estimate of long-run return on equity (ROE)15%Estimate of long-run dividend payout ratio40%Investors’ required rate of return12%The company’s justified forward P/E is closest to: 10.0.20.0.13.3.Correct.Justified forward P/E: P0/E1= 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%.P0/E1= p / (r – g) = 0.40 / (0.12 – 0.09) = 13.3×.Alternatively:Justified forward P/E: P0/E1= (D1/E1)/(r– gg= (1 – Dividend payout ratio) × ROE = (1 – 0.40) × 15 = 9%.D1= $1.47 × 1.09 = 1.60; E1= $4.00 (given); r= Required rate of return = 12% (given).P0/E1= (D1/E1)/(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 Question27 of 30An investor gathered the following data:Par value of preferred stock offered with a 6% dividend rate$100Company’s sustainable growth rate5%Yield on comparable preferred stock issues11.5%Investor’s marginal tax rate30%The value of the company’s preferred stock is closestto:
Correct. CFA Level I “Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox Section 4.1 Question28 of 30A 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 closestto: CFA Level I “Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox Section 4.1 Question29 of 30An investor gathers the following information about a company:Current dividend per share$3Historical annual dividend growth rate4%Expected annual dividend growth rate for the next three years8%Expected stock value per share at the end of Year 3$33
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- Fall '13
- Stephen E. Wilcox, John J. Nagorniak