QUESTION 1
You are scanning a list of stocks in the specialty retail sector for bargains. The PE ratios, expected growth rates in earnings, risk levels and payout ratios (including both dividends and stock buybacks) are listed below.
|
Speciality Retail Stocks
|
|
Firm
|
Current PE
|
Exp. Growth
|
Beta
|
Payout
|
|
Gap
|
45
|
30%
|
High
|
10%
|
|
Limited
|
15
|
10%
|
Low
|
40%
|
|
Abercrombie
|
45
|
10%
|
High
|
10%
|
|
Ann Taylor
|
45
|
10%
|
Low
|
10%
|
|
Talbots
|
15
|
30%
|
Low
|
40%
|
|
Gymboree
|
15
|
30%
|
High
|
40%
|
Question 2:
Which of these firms is most likely to be under-valued? (Choose only one firm.)
a. Gap
b. Limited
c. Abercrombie
d. Ann Taylor
e. Talbots
f. Gymboree
QUESTION 3 (Refer to Question 1 for background information.)
Which of these firms is most likely to be over-valued? (Choose only one firm.)
a. Gap
b. Limited
c. Abercrombie
d. Ann Taylor
e. Talbots
f. Gymboree
QUESTION 4 One of the principles of using multiples correctly is that one cannot mix-match the numerator with denominator. Both should correspond to the same group of claimholders. Which multiple below is a CORRECT example of following this principle?
a. Market value of equity/free cash flow to the firm
b. Enterprise value/net income
c. Market value of the firm/free cash flow to the equity holders
d. Market value of equity/book value of equity
QUESTION 5: Jorge Zaldys, CFA, is researching the relative valuation of two companies in the aerospace/defense industry, NCI Heavy Industries (NCI) and Relay Group International (RGI). He has gathered relevant information on the companies in the following table.
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Relative Valuation
|
|
Information
|
RGI
|
NCI
|
|
EBITDA
|
100
|
100
|
|
Interest Expense
|
0
|
20
|
|
Earnings Before Tax
|
100
|
80
|
|
Tax (40%)
|
40
|
32
|
|
Net Income
|
60
|
48
|
|
Cash and Short-term Investments
|
40
|
20
|
|
MV of Debt
|
0
|
400
|
|
BV of Debt
|
0
|
350
|
|
Price per Share
|
10
|
20
|
|
Shares Outstanding
|
100
|
30
|
Question 6. Calculate RGI and NCI's Enterprise Value.
a. 1,000 / 1,000
b. 1,000 / 600
c. 960 / 1,000
d. 960 / 980
QUESTION 7. (Refer to Question 4 for background information.)
Calculate RGI and NCI's earnings per share.
a. 60, 48
b. 0.6, 1.6
c. 1, 33.33
d. 10, 3.33
QUESTION 8. (Refer to Question 4 for background information.)
Calculate RGI's EV/EBITDA ratio and P/E ratio.
a. 10, 12.5
b. 9.6, 16.67
c. 10, 16.67
d. 9.6, 12.5
QUESTION 9
(Refer to Question 4 for background information.)
Calculate NCI's EV/EBITDA ratio and P/E ratio.
a. 10, 12.5
b. 9.8, 16.67
c. 10, 16.67
d. 9.8, 12.5
QUESTION 10 (Refer to Question 4 for background information.)
Since RGI's P/E ratio is significantly higher than NCI, highly likely RGI is overvalued.
True
False