Given the information below: * EPS: $4.68. * Book value per share: $20.32. * Earnings retention ratio: 60%. * Required rate of return on equity: 18%. * Required rate of return on debt: 10%. * Debt ratio (debt / capital): 40%. The P/BV ratio is ______. A. 2.13. B. 2.19. C. 2.35. D. 2.51.
I am getting 2.20 , so B
B ROE = NI/EQUITY = 4.68/20.32 = 23% g = ROE(1-b) = .23(.6) = 13.8% P/BV = (ROE - g) / (r-g) = 2.19 B
ROE = EPS / BVPS = 4.68/20.32 = 0.23 g = ROE * RR = 0.23 * 60% = 0.138189 P = EPS*(1-RR)*(1+g) / (r - g) = 4.68 * 0.4 * 0.138189 / (0.18 - 0.138189) = 50.96 P/BV = 50.96 / 20.32 = 2.507874
Ok, because the info is unclear, I’ve gotten B & D, depending on whether Earnings provided is E(0) or E(1). Is there more to the question?
Yep, exactly how I got both answers.
well we need to know if the EPS is the expected EPS or the past EPS. Thats the diff between B and D. Incomplete data to answer the question
I just did this problem again and got D like the above poster, and Black Swan.
I dont know the correct answer but there is a catch with WACC instead of r in denominator!!
you can’t compute the correct wacc here in this question since you don’t know the firm’s marginal tax rate.
distractors. Book value of equity -debt has no role to play
I’m getting D
correction, it should be B
i got B the same way budfox did it the first time. is B the justified P/BV, and D the actual P/BV?
i got b, and used earnings/BV to get ROE. Remember that ROE*earnings will give you earnings, thus I reversed it to get ROE. Then use ROE*r to get g, use the justified equation, voila.
* EPS: $4.68. * Book value per share: $20.32. * Earnings retention ratio: 60%. * Required rate of return on equity: 18%. * Required rate of return on debt: 10%.
Ok guys good for whoever got B, thatz the answer in Ana***notes.com ( web master made it as @#@#@ - I am not responsible.) I went the P/BV = 50.96 / 20.32 = 2.507874, route and got a wrong one. Can someone explain what creates inthe delta between 2 methods and which formula shoud be used in the exam ?
I think it is becauce ROE = E1/B0. This is in Schweser residual income section. If we calculate ROE like that, we have assumed 4.68 is expected EPS. So we should not multiply (1+g) while using DDM modle. Then using DDM will get B as well.