Week 6 homework
NicholasHawkins
fin550week6homework.xlsxChapter 12Q4
| 4 |
| Currently, the dividend-payout ratio (D/E) for the aggregate market is 60 percent, the required return (k) is 11 percent, and the expected growth rate for dividends (g) is 5 percent. |
| a. |
| Compute the current earnings multiplier. |
| b. |
| You expect the D/E payout ratio to decline to 50 percent, but you assume there will be no other changes. What will be the P/E? |
| c. |
| Starting with the initial conditions, you expect the dividend-payout ratio to be constant, the rate of inflation to increase by 3 percent, and the growth rate to increase by 2 percent. Compute the expected P/E. |
| d. |
| Starting with the initial conditions, you expect the dividend-payout ratio to be constant, the rate of inflation to decline by 3 percent, and the growth rate to decline by 1 percent. Compute the expected P/E. |
| Question 4 asks you to analyze your industry in terms of the five factors that determine the industry competition. This is an analysis of Porter’s Five Factors. Porter’s Five Factors is a well known concept, so you should have no problem with this. |
Chapter12Q7
| 7. Given the three EPS estimates in Problem 6, you are also given the following estimates related to the market earnings multiple: | |||||
| a. | |||||
| Based on the three EPS and P/E estimates, compute the high, low, and consensus intrinsic market value for the S&P Industrials Index in 2013. | |||||
| b. | |||||
| Assuming that the S&P Industrials Index at the beginning of the year was priced at 2,050, compute your estimated rate of return under the three scenarios from Part a. Assuming your required rate of return is equal to the consensus, how would you weight the S&P Industrials Index in your global portfolio? | |||||
| Information from problem 6 | |||||
| You are given the following estimated per share data related to the S&P Industrials Index for the year 2013: | |||||
| Sales | $1,450.00 | ||||
| Depreciation | 58 | ||||
| Interest expense | 8 | ||||
| From Problem 6 | |||||
| Consensus | optimisitc | Pessimistic | |||
| Sales | $ 1,450.00 | $ 1,450.00 | $ 1,450.00 | ||
| Depreciation | $ 58.00 | $ 58.00 | $ 58.00 | ||
| Interest Expense | $ 28.00 | $ 28.00 | $ 28.00 | ||
| EBIT | $ 174.00 islan_000: islan_000: This EBIT is calculated at a 12% return, which is the consensus return. | $ 188.50 islan_000: islan_000: EBIT at the optimistic 13% return | $ 159.50 islan_000: islan_000: EBIT at the pessiistic return of 11% |
||
| less: | |||||
| Depreciation | $ 58.00 | $ 58.00 | $ 58.00 | ||
| Interest Expense | $ 28.00 | $ 28.00 | $ 28.00 | ||
| EBT | $ 88.00 | $ 102.50 | $ 73.50 | ||
| Taxes | $ 28.16 | $ 32.80 | $ 23.52 | ||
| NI or EPS | $ 59.84 islan_000: islan_000: Each of the NI or EPS is a simple function of following the income statement math | $ 69.70 | $ 49.98 | ||
| Problem 7 | |||||
| D/E | 0.55 | 0.45 | 0.65 | ||
| Nominal RFR | 0.09 | 0.08 | 0.1 | ||
| Risk Premium | 0.04 | 0.03 | 0.05 | ||
| ROE | 0.13 | 0.15 | 0.11 | ||
| Required Return | 0.13 islan_000: islan_000: Required return is the risk free rate plus the risk premium. | 0.11 | 0.15 | ||
| Growth rates | 0.0585 islan_000: islan_000: Growth rate is 1-D/E multiplied times the ROE |
islan_000: islan_000: EBIT at the optimistic 13% return | 0.0825 | 0.0385 | |
| P/E Ratios | 7.6923076923 islan_000: islan_000: The P/E ratio is calculated by dividing the D/E ratio by the (required return - growth rate) |
islan_000: islan_000: EBIT at the pessiistic return of 11% | 16.3636363636 | 5.8295964126 | |
| Index Price | 460.3076923077 islan_000: islan_000: Multiply the P/E ratio times the NI or EPS determined in problem 6 |
islan_000: islan_000: Each of the NI or EPS is a simple function of following the income statement math |
islan_000: islan_000: Required return is the risk free rate plus the risk premium. | 1140.5454545454 | 291.3632286996 |
| rate of return (7-b) | -77.55% | -44.36% | -85.79% |
Chapter12Q8
| 8 | |
| You are analyzing the U.S. equity market based upon the S&P Industrials Index and using the present value of free cash flow to equity technique. Your inputs are as follows: | |
| a. | |
| Assuming that the current value for the S&P Industrials Index is 2,050, would you underweight, overweight, or market weight the U.S. equity market? | |
| b. | |
| Assume that there is a 1 percent increase in the rate of inflation—what would be the market's value, and how would you weight the U.S. market? State your assumptions. | |
Chapter13Q4
| 4 |
| Select an industry from Standard and Poors Anaylsis Handbook.Evaluate your industry in terms of the five factors that determine an industry's intensity of competition. Based on this analysis, what are your expectations about the industry's profitability in the short run (1 or 2 years) and the long run (5 to 10 years)? |
Chapter13Q5
| 5 |
| Using Standard and Poor's Analysts' Handbook or another source, plot the latest 10-year history of the operating profit margin for the S&P Industrials Index or another aggregate market series versus an industry of your choice. Is there a positive, negative, or zero correlation? |
| Question 5 asks you to use the Standard and Poor’s Analysts’ Handbook to plot the 10 years of the S&P operating profit margin and then compare this to the operating profit margin of your industry. Here is the issue, the Analysts’ Handbook doesn’t exist anymore, so you will have to find another source. There are other sources out there, and one such source is: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html |
Chapter13Q7
| 7 | ||||
| Prepare a table listing the variables that influence the earnings multiplier for your chosen industry and the market index series for the most recent 10 years. | On question 7, don’t over-complicate this. You are start by preparing a table of variables that influence the earnings multiplier. There are several variables, such as earning retention rate, dividend payout ratio, growth rate, etc. Just come up with variables that influence your earnings multiplier. Then answer the three questions, which are pretty straight forward. For example, in ‘a’, is your dividend payout ratio different from the S&P, or other industries? If so, why? Is the risk different than other industries? These are all open-ended questions that you can really get creative with. | |||
| a. | ||||
| Do the average dividend-payout ratios for your industry and the market index differ? How should the dividend payout influence the difference between the multipliers? | ||||
| b. | ||||
| Based on the fundamental factors, would you expect the risk for this industry to differ from that for the market? In what direction, and why? Calculate the industry beta using monthly data for five years. Based on the fundamental factors and the computed systematic risk, how does this industry's risk compare to the market? What effect will this difference in risk have on the industry multiplier relative to the market multiplier? | ||||
| c. | ||||
| Analyze and discuss the different components of growth (retention rate, total asset turnover, total assets/equity, and profit margin) for your chosen industry and a market index during the most recent 10 years. Based on this analysis, how would you expect the growth rate for your industry to compare with the growth rate for the market index? How would this difference in expected growth affect the multiplier? | ||||
