FIN – What would you look for to justify a price/book value ratio of 3.0?

FIN – What would you look for to justify a price/book value ratio of 3.0?

Question CH14 Q10: What would you look for to justify a price/book value ratio of 3.0? What would you expect to be the characteristics of a firm with a P/BV ratio of 0.6?

CH14 Q21: You are told that a growth company has a P/E ratio of 13 times and a growth rate of 15 percent compared to the aggregate market, which has a growth rate of 8 percent and a P/E ratio of 16 times. What does this comparison imply regarding the growth company? What else do you need to know to properly compare the growth company to the aggregate market?

CH14 P9: Your client is considering the purchase of $100,000 in common stock, which pays no dividends and will appreciate in market value by 10 percent per year. At the same time, the client is considering an opportunity to invest $100,000 in a lease obligation that will provide the annual year-end cash flows listed in Exhibit 14.23 below. Assume that each investment will be sold at the end of three years and that you are given no additional information.

Calculate the present value of each of the two investments assuming a 10 percent discount rate, and state which one will provide the higher return over the three-year period. Use the data in Exhibit 14.23, and show your calculations.

CH14 P10: 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

$0:60 = Annual Dividend One Year Forward

a. Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model.

b. Briefly discuss three disadvantages of the constant-growth dividend discount model in its application to investment analysis.

c. Identify three alternative methods to the dividend discount model for the valuation of companies.

CH15 Q14: What is the purpose of computing a moving-average line for a stock? Describe a bullish pattern using a 50-day moving-average line and the stock volume of trading. Discuss why this pattern is considered bullish.

CH15 Q15: Assuming a stock price and volume chart that also contains a 50-day and a 200-day MA line, describe a bearish pattern with the two MA lines and discuss why it is bearish.

CH15 P4: Currently, Charlotte Art Importers is selling at $23 per share. Although you are somewhat dubious about technical analysis, you want to know how technicians who use point-and figure charts would view this stock. You decide to note one-point movements and three point reversals. You gather the following historical price information:

Date Price Date Price Date Price

4/1 2312

4/18 33

5/3 27

4/4 2812

4/19 3538

5/4 2612

4/5 28

4/20 37

5/5 28

4/6 28

4/21 3812

5/6 2814

4/7 2934

4/22 36

5/9 2818

4/8 3012

4/25 35

5/10 2814

4/11 3012

4/26 3514

5/11 2918

4/12 3218

4/27 3318

5/12 3014

4/13 32

4/28 3278

5/13 2978

Plot the point-and-figure chart, using Xs for uptrends and Os for downtrends. How would a technician evaluate these movements? Discuss why you would expect a technician to buy, sell, or hold the stock based on this chart.

CH15 P5: Assume the following daily closings for the Dow Jones Industrial Average:


1 13,010 7 13,220

2 13,100 8 13,130

3 13,165 9 13,250

4 13,080 10 13,315

5 13,070 11 13,240

6 13,150 12 13,310

a. Calculate a four-day moving average for Days 4 through 12.

b. Assume that the index on Day 13 closes at 13,300. Would this signal a buy or sell decision?