What will happen to the Justified P/E ratio of a company if their asset turnover increases? A) Increase B) Decrease C) No Change D) Not enough info
Umm…since its april 1st…i am going to go with d…
C
asset turnover increases, roe increases, growth rate increases, so p/e increases A?
B
Forget B, I’ll go for C
A - Return on Equity will increase, so PE will increase. Growth would technically increase too, so D is not unreasonable, but CFAI for some reason likes to ignore growth in this particular case…
Dimes27 Wrote: ------------------------------------------------------- > asset turnover increases, roe increases, growth > rate increases, so p/e increases > > A? Ding, ding, ding!!! A is correct. As asset turnover increases, ROE increases, resulting in an increase in the growth rate. As g increases the value of (r-g) decreases, increasing the justified p/e ratio.
wanderingcfa Wrote: ------------------------------------------------------- > Dimes27 Wrote: > -------------------------------------------------- > ----- > > asset turnover increases, roe increases, growth > > rate increases, so p/e increases > > > > A? > > > Ding, ding, ding!!! > > A is correct. > > As asset turnover increases, ROE increases, > resulting in an increase in the growth rate. As g > increases the value of (r-g) decreases, increasing > the justified p/e ratio. You are assuming that the increase in the asset turnover increases was due to 1) an increase in Sales and 2) that the net profit margin remained constant, not to mention that you assumed that Equity and dividend payout ratio remained constant … If the company paid off some debt using some extra cash that was sitting on the balance sheet for which the company didn’t have any positive NPV projetcs, their asset turnover would increase and the Justified P/E would remain unchanged (assuming everything else was held constant). hence, the correct answer is D
On the other hand, if a company reduces their financial leverage (paying off debt from unutilized cash) then r=required rate should go down, pushing p/e up
What Dimes said, but the heart of it is that if ROA increases, based on dupont formula, ROE, increases which increases fundamental PE. But hey, you argue wtih the book all you want Olivier, however, I would highly recommend you agree with it on June 7th.
Black Swan Wrote: ------------------------------------------------------- > What Dimes said, but the heart of it is that if > ROA increases, based on dupont formula, ROE, > increases which increases fundamental PE. But > hey, you argue wtih the book all you want Olivier, > however, I would highly recommend you agree with > it on June 7th. As you go back to the Dupont formula, I’ll tell you that if asset turnover changes, then either Net Profit Margin or Financial leverage will very likely change. You base your answer on the assuption that Asset turnover does change and that Net Profit Margin or Financial leverage will NOT change. Since Asset turnover is based on Sales and Total Assets, Net Profit Margin is based on Sales and net Income ; and Financial leverage is based on Total Assets and Equity, the only way we can get Asset turnover to change while keeping Net Profit Margin & Financial leverage constant would be to have chnages in Equity and/or Net Income that would cancel out the change in Sales and/or Total Assets. That is very unlikely. You can dream about any question and any assumption you want Black Swan, however, I would highly recommend you to answer the question written on the booklet provided by the CFAI on June 7th
olivier Wrote: ------------------------------------------------------- > You can dream about any question and any > assumption you want Black Swan, however, I would > highly recommend you to answer the question > written on the booklet provided by the CFAI on > June 7th I agree, which is where I think we need to realize what concepts CFAI wants us to understand. I have a feeling that on June 7th, we will have little doubt as to how the relationships change and which values we are to consider.
Damn, I really need to review this stuff!
Olivier, did you miss the part where the correct answer FROM THE BOOK was A? Jesus.
Joined the party late… but I’ll go with ‘A’ too.
too serious for april 1 question
Black Swan Wrote: ------------------------------------------------------- > Olivier, did you miss the part where the correct > answer FROM THE BOOK was A? Jesus. Which book?
Black Swan Wrote: ------------------------------------------------------- > Olivier, did you miss the part where the correct > answer FROM THE BOOK was A? Jesus. Does Schweser publish an “April 1” question book?
WanderingCFA, which book, to appease this guy that just hates to be proven wrong.