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The Coop

In: Business and Management

Submitted By ravatpura
Words 381
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1. Investors receive dividends as payoffs for investing in equity shares. Thus the value of a share should be calculated by discounting expected dividends. True or false?

2. Some analysts trumpet the saying “Cash is King.” They mean that cash is the primary fundamental that the equity analyst should focus on. Is cash king? Should a firm that has higher free cash flows have a higher value?

3. Information indicates that a firm will earn a return on common equity above its cost of equity capital in all years in the future, but its shares trade below book value. Those shares must be mispriced. True or false?

4. Jetform Corporation traded at a price-to-book ratio of 1.01 in May 1999. Its most recently reported ROCE was 10.1 percent, and it is deemed to have a required equity return of 10 percent. What is your best guess as to the ROCE expected for the next fiscal year?

5. Telesoft Corp. traded at a price-to-book ratio of 0.98 in May 1999 after reporting an ROCE of 52.2 percent. Does the market regard this ROCE as normal, unusually high, or unusually low?

6. A share trades at a price-to-book ratio of 0.7. An analyst who forecasts an ROCE of 12 percent each year in the future, and sets the required equity return at 10 percent, recommends a hold position. Does his recommendation agree with his forecast?

7. Explain why analysts’ forecasts of earnings-per-share growth typically underestimate the growth that an investor values if a firm pays dividends.

8. The historical earnings growth rate for the S&P 500 companies has been about 8.5 percent. Yet the required growth rate for equity investors is considered to be about 12 percent. Can you explain the inconsistency?

9. The following formula is often used to value shares, where Earn1 is forward earnings, r is the cost of capital, and g is the expected earnings growth rate. Explain why this formula can lead to errors.

10. A firm’s earnings are expected to grow at a rate equal to the required rate of return for its equity, 12 percent. What is the trailing P/E ratio? What is the forward P/E ratio?

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