P/B and P/S Ratios (Schweser Vol 2 Exam 3 Morning Q37,38,39)

CFA Level II Equities
#1

Data Given is:

Able Corporation

Revenue/Share 115

EPS 2.5

DPS 1

ROE 25%

BVPS 10

Stock Price per share 60

Required return 20%

Baker Inc

Revenue/Share 52.8

EPS 4.8

DPS 1.6

ROE 15%

BVPS 32

Stock Price per share 70

Required return 20%

My confusion EPS and DPS are supposed to be D0 and E0 but the numbers given correspond to what would be D1and E1. For example for Able corp E1 should equal B0*ROE. E1 = 10*25%= 2.5 This means that when calculating the P/B ratio for Able Corp using (ROE-g)/(r-g) you will get the correct answer of 2.0. However if you use (D0*(1+g)/B0)/(r-g) you will get the wrong answer by a factor of (1+g). Has Schweser just been poor here by giving D1 instead of D0!??

#2

Evidence that DPS is supposed to be D0 is in the answer to 38.

They give P/S = PM *payout ratio *(1+g)/ (r-g)

If DPS was really D1 then (1+g) would not be needed here so proof that DPS is D0 for these questions.

Very confusing! Any ideas?

#3

Any ideas on this guys? Any insight would be much appreciated… let me know if I haven’t explained the issue well.

It should become clear by doing the question… hopefully a discrepency like this wouldn’t come up on the actual exam!