Name____________________________________________

FIN 4460: Exam #3:  Summer 2021

Multiple-choice questions are worth 3 points each for a total of 30 points.

1. Residual Earnings is defined as:

a. (ROCE-required return) Book Value of Debt

b. (ROCE-required return) Book Value of Equity

c. (ROCE-required return) Book Value of the Enterprise

2. Normal Forward P/E ratio is defined as:

a. (1+r)/r

b. 1/r

c. r/ (1+r)

3. Trailing P/E is defined as:

a. (Price+Dividend)/ Earnings

b. Dividends/Earnings

c. Price/Earnings

4. Abnormal Earnings Growth (AEG) is defined as:

a. Cumulative-dividend earnings-normal earnings

b. (EPS+DPS) (1+r)

c. PV of EPS

5. Dividend earnings + earnings is associated with the:

a. Abnormal Earnings Growth Model

b. Residual Earnings Model

c. Earnings that are based on the change in residual earnings model

6. Abnormal Earnings Growth (AEG) can:

a. Be a positive, negative number or zero number

b. Only positive

c. Only negative

7. The minimum New York Stock exchange price is:

a. A negative dollar amount like – $1.00

b. A positive one dollar amount $1.00

c. At lowest zero

8.  The Change in Residual Earnings and Abnormal Earning Growth models use the following conceptual idea:

a. Future Value Interest Factor

b. Mixed Income Stream Factor

c. Perpetuity

9.  The change in Residual Earnings and Abnormal earnings growth models are based on the idea:

a. VPS = Book value per share + the present value of projected earnings

b. VPS= Earnings per share + the present value of projected earnings

c. VPS = Dividends per share + the future value of projected earnings

10. The estimated formula value per share is $43 and the market price is $35. What should an investor that has a portfolio of stocks do?

a. Buy

b. Sell

c Hold

Problems: 70 points. Theyare shown on a per share basis.

Please show all of you work on the exam. Type your answers onto the exam. Thanks

1. Use the following information to calculate: A. Normal Forward P/E, b. Trailing P/E and c. Normal Trailing P/E.

The required return is 8% 

Market Price per share $37.50

DPS= $.25

EPS =$3.00

Calculate the Following Ratios:

A: Normal Forward P/E:

B: Trailing P/E

C. Normal Trailing P/E:

2. Calculate the estimated value per share using theChange in Residual Earnings Method: Complete the chart:

N   0 1 2 3

2010 2011 2012 2013 2014

EPS $3.00 $3.60 $4.10 $5.50 

DPS    .25  .25  .30 .35

Difference 

BPS $15.00   

ROCE 

Residual Earnings 

Change in RE 

PV Change RE 

 PV of CV 

Total 

Capitalized VPS  ________________________________________________________________________

Show RE Calculation: below

RE 2011: 

RE 2012: 

RE 2013: 

RE 2014: _________________________________________________________________________

The required return is 8% and the growth rate is 2.5% after 2014.

CV uses the (1+g) adjustment

A. Complete the Table:

B. Calculate Value per Share using the change in residual earnings model:

3. Calculate the Abnormal Earnings Growth (AEG) Model using the information shown below:

Part A. Complete the Table. Please, note that DPS is show first followed by EPS.

Table ($) numbers are per share not total earnings or dividends.

N 0  1  2  3

 2011   2012  2013  2014

DPS  .25  .25   .30   .35

EPS   3.00  3.60 4.10  5.50

DPS earnings  

EPS+ DPS earnings 

Normal Earnings 

AEG  

PV of AEG 

PV of Continuing Value 

Total 

Capitalized VPS 

The growth rate after 2014 is 2.5% and reinvestment rate and discount rate or capitalization rate is 8%. Complete the chart.

CV uses the (1+g) adjustment

4. Chapter 7: Calculate the Expected Return (r) given the following information.

· The Book to Price ratio is 90%.

· Price is $100

· Growth rate (g) is 7%

· Earnings per share are $3.00

· Book Value is $90 per share

Calculate Expected Return:

5. Calculate the growth rate of a stock using the Residual Earnings Method that pays:

· EPS= $3.20

· Required return on equity is 3%

· BPS = $90

· Price per share is $100

Part A: Show the formula, load numbers into the formula and calculate the growth rate using Reverse Engineering “g”.