what determines your investment decision?

CHAPTER 14

QUESTION 6

Lauren Entertainment, Inc., has an 18 percent annual growth rate compared to the market rate of 8 percent. If the market multiple is 18, determine P/E ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel it can maintain its superior growth rate for:

a.       the next 10 years.

b.      the next 5 years.

 

QUESTION 7

You are given the following information about two computer software firms and the S&P Industrials:

	COMPANY A	COMPANY B	S&P Industrials
P/E ratio   Expected annual growth rate   Dividend yield	30.00   0.18   0.00	27.00   0.15   0.01	18.00   0.07   0.02

a.       Compute the growth duration of each company stock relative to the S&P Industrials.

b.      Compute the growth duration of Company A relative to Company B.

c.       Given these growth durations, what determines your investment decision?

 

QUESTION 8

The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset’s present value. A dividend valuation model such as the following is frequently used:

P_i =    ­­­­­­­­­­­­­­­­­_______D_{1_________}

( K_i – G_i )

Where;   P_i = the current price of common Stock i

D₁ = the expected dividend in Period 1

K_i = the required rate of return on Stock i

G_i = the expected constant-growth rate of dividend for Stock i

a.       Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds.

b.      Explain the principal problem involved in using a dividend valuation model to value:

(1) companies whose operations are closely correlated with economic cycles.

(2) companies that are of very large and mature.

(3) companies that are quite small and are growing rapidly.

Assume that all companies pay dividends.

 

QUESTION 10

The constant-growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.

Assume      $20 = Price of a stock today

8% = Expected growth rate of dividends

CHAPTER 14

QUESTION 6

Lauren Entertainment, Inc., has an 18 percent annual growth rate compared to the market rate of 8 percent. If the market multiple is 18, determine P/E ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel it can maintain its superior growth rate for:

a.       the next 10 years.

b.      the next 5 years.

 

QUESTION 7

You are given the following information about two computer software firms and the S&P Industrials:

	COMPANY A	COMPANY B	S&P Industrials
P/E ratio   Expected annual growth rate   Dividend yield	30.00   0.18   0.00	27.00   0.15   0.01	18.00   0.07   0.02

a.       Compute the growth duration of each company stock relative to the S&P Industrials.

b.      Compute the growth duration of Company A relative to Company B.

c.       Given these growth durations, what determines your investment decision?

 

QUESTION 8

The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset’s present value. A dividend valuation model such as the following is frequently used:

P_i =    ­­­­­­­­­­­­­­­­­_______D_{1_________}

( K_i – G_i )

Where;   P_i = the current price of common Stock i

D₁ = the expected dividend in Period 1

K_i = the required rate of return on Stock i

G_i = the expected constant-growth rate of dividend for Stock i

a.       Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds.

b.      Explain the principal problem involved in using a dividend valuation model to value:

(1) companies whose operations are closely correlated with economic cycles.

(2) companies that are of very large and mature.

(3) companies that are quite small and are growing rapidly.

Assume that all companies pay dividends.

 

QUESTION 10

The constant-growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.

Assume      $20 = Price of a stock today

8% = Expected growth rate of dividends