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Exam 12: Macroanalysis and Microvaluation of the Stock Market

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Question 41

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Exhibit 12.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company. $\begin{array} { l r r } & \text { Year } 2003& \begin{array} { r } \text { Estimated } \\\text { Year 2004 }\end{array} \\\hline \text { GDP } & 11,000 \text { Billion } \\\text { GDP growth } && 3.5 \%\\\text { Sales per share} &\$ 800 \\\text { Operating profit margin}&12 \% \\\text { Depreciation/Fixed Assets } && 14 \% \\\text { Fixed asset turnover } && 2 \\\text { Interest rate } && 3.5 \% \\\text { Total asset turnover } && 0.7 \\\text { Debt/Total assets } && 45 \% \\\text { Tax rate } && 36 \%\\\end{array}$ In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is % $\Delta$ Sales per share = 0.015 + 0.75(% $\Delta$ GDP) -Refer to Exhibit 12.6. Calculate the firm's year 2004 EBITDA per share.

A) $95.05
B) $87.15
C) $112.56
D) $104.73
E) $99.96

F) B) and D)
G) A) and B)

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Question 42

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A 1971 study by Finkel and Tuttle hypothesizes that all of the following variables affect the aggregate profit margin except

A) Capacity utilization rate
B) Unit labor costs
C) Variable labor costs
D) Rate of inflation
E) Foreign competition

F) C) and D)
G) A) and E)

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Question 43

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The initial effect of a change in monetary policy appears in ____ and only later in ____.

The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a random manner.

The Goldman Sach analysis recommends an allocation of equity investments among countries in comparison to the country's normal weighting based on its relative market value.

Exhibit 12.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are using the free cash flow to equity (FCFE) technique to analyze U.S. equity market. The beginning FCFE is $90 and the required rate of return is 10%. Free cash flows are expected to grow at a 10% rate for the next two years and then grow at a constant rate of 7% forever. -Refer to Exhibit 12.7. What will FCFE be three years from now?

The economic factor assumed to be closely related to stock prices is productivity.

A major advantage of the cyclical indicator approach is that it spans all important major economic sectors including the service sector and import-exports.

Exhibit 12.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for the MacLog Company. $\begin{array} { l r r } & \text { Year } 2003& \begin{array} { r } \text { Estimated } \\\text { Year 2004 }\end{array} \\\hline \text { GDP } & 11,000 \text { Billion } \\\text { GDP growth } && 3.5 \%\\\text { Sales per share} &\$ 800 \\\text { Operating profit margin}&12 \% \\\text { Depreciation/Fixed Assets } && 14 \% \\\text { Fixed asset turnover } && 2 \\\text { Interest rate } && 3.5 \% \\\text { Total asset turnover } && 0.7 \\\text { Debt/Total assets } && 45 \% \\\text { Tax rate } && 36 \%\\\end{array}$ In addition a regression analysis indicates the following relationship between growth in sales per share for MacLog and GDP growth is % $\Delta$ Sales per share = 0.015 + 0.75(% $\Delta$ GDP) -Refer to Exhibit 12.6. Calculate GDP for the year 2004.

In well developed economies, markets are not affected by changes in expected inflation.

Exhibit 12.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) An analyst wishes to estimate the share price for Ashley Corporation. The following information is made available: Estimated profit margin = 15% Total asset turnover = 2 Financial leverage = 1.2 Estimated dividend payout ratio = 75% Required rate of return = 14% Estimated EPS = $2.50 -Refer to Exhibit 12.5. Calculate the firm's estimated share price.

Exhibit 12.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As an economist for a research firm you are forecasting the market P/E ratio using the dividend discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio to be 55%. Long-term government bond rates are at 6% and the equity risk premium is estimated to be 3%. Return on equity (ROE) is estimated to be 11%. -Refer to Exhibit 12.8. What is your expectation of the market P/E ratio?

When estimating a major stock market value using the earnings multiplier approach near-term estimates of the required rate of return and growth rate are essential due to the impact of near-term events on cash flows.

One of the economic series included in the National Bureau of Economic Research (NBER) coincident indicator is the index of industrial production.

Coincident indicators include economic time series that have peaks and troughs that roughly occur at the same time as the peaks and troughs of overall economic activity.

If, for the S&P Industrials Index, the profit margin was 0.20 and the equity turnover ratio was 13, the ROE would be:

Exhibit 12.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Assume that the dividend payout ratio will be 45 percent when the rate on long term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 16 percent return. The return on equity will be 14 percent. -Refer to Exhibit 12.4. What is the expected sustainable growth rate?

It is reasonable to expect corporate sales to be closely related to GNP.

Which of the following series does not include the long-leading index?

Which of the following is not a determinant of the aggregate gross profit margin?