INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 18, Problem 11CP
Summary Introduction
To calculate: it is to be determined that firm is undervalued or overvalued on P/E-to growth basis, assuming that the risks are similar in both the industries.
Introduction: PEG (Price/earnings to growth) ratio is a stock valuation. The value of the ratio represents the accurate correlation between company’s market value and the projected earning growth.
The PEG ratio is calculated by the ratio of the price/earnings to growth. It can be given as −
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1. Calculate the average stock return from 2005–2007, the standard deviation and coefficient of variation over this period.
The market price of the stock was $31 at year-end 2004, $35 at year-end 2005, $42 at year-end 2006, and $55 at year-end 2007.
For valuation purposes, industry experts use the dividend valuation model to value the common equity interest of industry firms.
Potential investors’ required rate of return for this firm is 14 percent; growth rate is 13 percent for 2010 and 2011, and then declines to 12 percent for all later years.
Market Returns: The stock returns for the market as a whole were as follows: 15.7 percent in 2005, 8.2 percent in 2006, and 12.1 percent in 2007
You obtain the following information about RIO:
Estimated earnings growth rate: 11.00%
Current Share Price: $25.00
EPS today: 1.71
You also have the following information about industry RIO is in:
Estimated earnings growth rate: 11.00%
Median P/E ratio: 19.90
Using the PEG approach and assume RIO has the same risk as the industry, is RIO’s equity value overvalued or undervalued compare to the industry?
As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and gL = 8.00% (constant). Based on the dividend growth model, what is the cost of common from reinvested earnings? 10.69% 11.25% 11.84% 12.43% 13.05%
Chapter 18 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - Prob. 4PSCh. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Prob. 8PSCh. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 5CPCh. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CP
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