FINANCE Investment Analysis and Portfolio Managem

FINANCE  Investment Analysis and Portfolio Management CHAPTER 12 QUESTIONS ANS PROBLEMS

1  Why   would   you   expect   a   relationship   between   economic   activity   and   stock   price   movements



2.     At   a   lunch   with   some   business   associates,   you   discuss   the   reason   for   the   relationship   between the economy and the stock market. One of your associates contends that she has   heard that stock prices typically turn before the economy does. How would you explain   this phenomenon?  


3.     Explain the following statements  ：  (a)There is a strong, consistent relationship between   money   supply   changes   and   stock   prices.   (b)Money   supply   changes   cannot   be   used   to   predict stock price movements. 

4.     You are informed of the following estimates  ：  Nominal money supply is expected to grow   at a rate of 7 percent, and GDP is estimated to grow at 4 percent. Explain what you think   will happen to stock prices during this period and the reason for your expectation. 


5.     The current rate of inflation is 3 percent, and long-term Treasury bonds are yielding 7   percent. You estimate that the rate of inflation will increase to 6 percent. What do you   expect to happen to long-term bond yields? Compute the effect of this change in inflation   on the price of a 15-year, 10 percent coupon bond with a current yield to maturity of 8   percent.  


6.     Some   observers   contend   that   it   is   harder   to   estimate   the   effect   of   a   change   in   interest   rates on common stocks than on bonds. Discuss this contention. 


   7.     An   investor   is   convinced   that   the   stock   market   will   experience   a   substantial   increase   next year because corporate earnings are expected to rise by at least 12 percent. Do you   agree or disagree? Why or why not?   



  9.     To arrive at an estimate of the net profit margin, why would you spend time estimating   the operating profit margin and work down?  


10.     You   are   convinced   that   capacity   utilization   next   year   will   decline   from   82   percent   to   about   79   percent.   Explain   what   effect   this   change   will   have   on   the   operating   profit   margin.  


11.     You   see   an   estimate   that   hourly   wage   rates   will   increase   by   6   percent   next   year.   How   does this affect your estimate of the operating profit margin? What other information do   you need to determine the effect of this wage rate increase and why do you need it?  



  12.     It   is   estimated   that,   next   year,   hourly   wage   rates   will   increase   by   7   percent   and   productivity will increase by 5 percent. What would you expect to happen to unit labor   cost?   Discuss   how   this   unit   labor   cost   estimate   would   influence   your   estimate   of   the   operating profit margin.   


   13. Assume that each of the following changes id independent (i.e., except for this change, all   other   factors   remain   unchanged).In   each   case,   indicate   what   will   happen   to   the   earnings   multiplier and explain why         a. The return on equity increases         b. The aggregate debt-equity ratio declines         c. Overall productivity of capital increases         d. The dividend-payout ratio declines  



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.