Question #71 - Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

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: 26

Status: Correct

Correct Answer: A

Shared Context

- Based on a comparison of the actual trailing P/FCFE ratio compared to the justified trailing P/FCFE ratio (based on Davenport's FCFE valuation model) for 2008, Sanford is: A) overvalued because the actual P/FCFE ratio is greater than the justified P/FCFE ratio for 2008. B) correctly valued because the actual P/FCFE ratio is equal to the justified P/FCFE ratio for 2008. C) undervalued because the actual P/FCFE ratio is less than the justified P/FCFE ratio for 2008.

Question

For purposes of this question only, assume Sanford's ROE is 20%, its current market price is $25, and the cost of equity is 14%. Sanford's implied growth rate in residual income is closest to:

Answer Choices:

A. 5.11%

B. 5.23%

C. 5.88%

Explanation

BVPS = 7,189 / 500 = $14.38 The implied growth rate can be calculated as:

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