Question #37
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 14
Status: Incorrect
Correct Answer: A
Your Answer: B
Part of Context Group: Q37-39
First in Group
Shared Context
Question
If the appropriate adjustments to the five justified ratios are implemented following the launch of the new product line at Yantra, then:
Answer Choices:
A. all five ratios will decline
B. four ratios will decline
C. three ratios will decline
Explanation
Generally, most justified ratios suffer when the discount rate is increased and/or assumed
growth rate decreased. However, the notable exception to this rule is justified dividend
yield. Lower growth implies more earnings available for dividend payments. Higher cost of
equity reduces share price, thus (maintaining a constant dollar dividend) the dividend yield
increases.
(Module 22.2, LOS 22.g)
V0 =
FCFE0×(1+g)
(r−g)
=
=
= 46.65
P
CF
(1+g)
(r−g)
1.072
(0.095−0.072)
=
D0
P0
(r−g)
(1+g)