FINANCE Investment Analysis and Portfolio Management CHAPTER 12 PROBLEMS
4 You are told that nominal GDP will increase by about 10 percent next year. Using Exhibit 12.15 and the regression equation, what increase would you expect in corporate sales? How would this estimate change if you gave more weight to the recent observations?
5. 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 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.
6. As an analyst for Charlotte, Chelle, and Denise, you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been expanding for 9 years, you expect the dividend-payout ratio will be at its low of 40 percent and that long-term government bond rates will rise to 7 percent. Because investors are becoming less risk averse, the equity risk premium will decline to 3 percent. As a result, investors will require a 10 percent return, and the return on equity will be 12 percent. a. What is the expected growth rate? b. What is your expectation of the market P/E ratio? c. What will be the value for the market index if the expectation is for earnings per share of $63.00?
7. You are given the following estimated per share data related to the S&P Industrials Index for the year 2007:
Sales: $1,020.00
Depreciation: 45.00
Interest expense: 18.00
You are also informed that the estimated operating profit margin is 0.152 and the tax rate is 32 percent.
a. Compute the estimated EPS for 2007.
b. Assume that a member of the research committee for your firm feels that it is important to consider a range of operating profit margin (OPM) estimates. Therefore, you are asked to derive both optimistic and pessimistic EPS estimates using 0.149 and 0.155 for the OPM and and holding everything else constant.
8. Given the three EPS estimates in Problem 7.you are also given the following estimates related to the market earnings multiple:
Pessimistic; Consensus; Optimistic
D/E---0.65; 0.55; 0.45
Nominal RFR---0.10; 0.09; 0.08
Risk premium---0.05; 0.04; 0.03
ROE----0.10; 0.13; 0.16
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 2007 ．
b. Assuming that the S&P Industrials Index at the beginning of the year was priced at 1,600, 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?
9. 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 ： Beginning FCFE ： $40.00 k=0.09 Growth Rate: Year 1-3: 9 ％
4-6: 8 ï¼…
7 and beyond: 7 ï¼…
a. Assuming that the current value for the S&P Industrials Index is 1600, 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.
USA 
India