Question #111
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: 38
Status: Unattempted
Question
An analyst has gathered the following data about the Garber Company: Payout Ratio = 60%. Expected Return on Equity = 16.75%. Required rate of return = 12.5%. What will be the appropriate price-to-book value (PBV) ratio for the Garber Company based on return differential?
Answer Choices:
A. 1.73
B. 0.58
C. 1.38
Explanation
The estimated growth rate is 6.7% [0.1675 × (1 − 0.60)] and PBV ratio based on rate
differential will be:
P0 / BV0 = (ROE1 − g) / (r − g) = (0.1675 − 0.067) / (0.125 − 0.067) = 1.73.