Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 8, Problem 28QP
Stock Valuation and PE [LO2] In the previous problem, we assumed that the stock had a single stock price for the year. However, if you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company over the past four years:
![Chapter 8, Problem 28QP, Stock Valuation and PE [LO2] In the previous problem, we assumed that the stock had a single stock](http://dev-ingestion-image-output.s3-website-us-east-1.amazonaws.com/9780077861704/Chapter-8/images/61704-8-28qp-question-digital_image_001.png)
Earnings are projected to grow at 9 percent over the next year. What are your high and low target stock prices over the next year?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single
benchmark PE ratio, we have a high and low PE ratio for each year. We can use these ratios to calculate a high and a
low stock price for the next year. Suppose we have the following information on a particular company:
High price
Low price
EPS
Year 1
$ 62.18
40.30
2.35
a. High target price
b. Low target price
Year 2
$ 67.29
43.18
2.58
Year 3
$74.18
39.27
2.73
Year 4
$ 78.27
46.21
2.89
Earnings are expected to grow at 9 percent over the next year.
a. What is the high target stock price in one year?
Note: Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
b. What is the low target stock price in one year?
Note: Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
A challenge we run into when forecasting future stock returns is
that stock returns compound. So, when using historical
averages to forecast the future, we need to average together
the arithmetic and geometric average returns using Blume's
Formula:
R(T) = T GeoAvg + NT Arith Avg
N-1
In this formula, N is the number of historical annual returns you
are using to calculate your averages and T is the number of
future annual returns you are forecasting.
Suppose you gather the following prices for a stock in order to
calculate the last 10 (N = 10) annual returns. The stock does not
pay dividends.
Time
0
1
Time
0
calculate the last 10 (N=10) annual returns. The stock does not
pay dividends.
1
2
3
4
5
10
6
.
7
8
9
10
Price
$23.16
$32.81
Price
$23.16
$32.81
$33.63
$36.83
$41.95
$41.04
$33.83
$37.45
$30.56
$29.90
$47.93
Using Blume's formula, what is the expected return per year for
the next 4 years (T = 4)?
Enter your answer as a percentage, rounded to the nearest 0.0001.
For example, for…
A. If a stock costs $55 one month and drops to $45 the next month, what is the expected stock price the next month, if we assume the stock follows a random walk?
B. Explain both technical and fundamental analysis and what form of the efficient market hypothesis corresponds to each.
Chapter 8 Solutions
Fundamentals of Corporate Finance
Ch. 8.1 - Prob. 8.1ACQCh. 8.1 - Does the value of a share of stock depend on how...Ch. 8.1 - What is the value of a share of stock when the...Ch. 8.2 - Prob. 8.2ACQCh. 8.2 - Prob. 8.2BCQCh. 8.2 - Why is preferred stock called preferred?Ch. 8.3 - Prob. 8.3ACQCh. 8.3 - Prob. 8.3BCQCh. 8.3 - How does NASDAQ differ from the NYSE?Ch. 8 - A stock is selling for 11.90 a share given a...
Ch. 8 - An 8 percent preferred stock sells for 54 a share....Ch. 8 - Prob. 8.3CTFCh. 8 - Stock Valuation [LO1] Why does the value of a...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Dividend Growth Model [LO1] Under what two...Ch. 8 - Common versus Preferred Stock [LO1] Suppose a...Ch. 8 - Prob. 6CRCTCh. 8 - Growth Rate [LO1] In the context of the dividend...Ch. 8 - Prob. 8CRCTCh. 8 - Prob. 9CRCTCh. 8 - Prob. 10CRCTCh. 8 - Prob. 11CRCTCh. 8 - Two-Stage Dividend Growth Model [LO1] One of the...Ch. 8 - Prob. 13CRCTCh. 8 - Price Ratio Valuation [LO2] What are the...Ch. 8 - Stock Values [LO1] The JacksonTimberlake Wardrobe...Ch. 8 - Stock Values [LO1] The next dividend payment by...Ch. 8 - Stock Values [LO1] For the company in the previous...Ch. 8 - Stock Values [LO1] Caan Corporation will pay a...Ch. 8 - Stock Valuation [LO1] Tell Me Why Co. is expected...Ch. 8 - Stock Valuation [LO1] Suppose you know that a...Ch. 8 - Stock Valuation [LO1] Estes Park Corp. pays a...Ch. 8 - Valuing Preferred Stock [LO1] Moraine, Inc., has...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Prob. 11QPCh. 8 - Prob. 12QPCh. 8 - Stock Valuation and PS [LO2] TwitterMe, Inc., is a...Ch. 8 - Stock Valuation [LO1] Bayou Okra Farms just paid a...Ch. 8 - Prob. 15QPCh. 8 - Nonconstant Dividends [LO1] Maloney, Inc., has an...Ch. 8 - Nonconstant Dividends [LO1] Lohn Corporation is...Ch. 8 - Supernormal Growth [LO1] Synovec Co. is growing...Ch. 8 - Prob. 19QPCh. 8 - Prob. 20QPCh. 8 - Prob. 21QPCh. 8 - Valuing Preferred Stock [LO1] E-Eyes.com just...Ch. 8 - Prob. 23QPCh. 8 - Two-Stage Dividend Growth Model [LO1] A7X Corp....Ch. 8 - Two-Stage Dividend Growth Model [LO1] Navel County...Ch. 8 - Stock Valuation and PE [LO2] Summers Corp....Ch. 8 - Stock Valuation and PE [LO2] You have found the...Ch. 8 - Stock Valuation and PE [LO2] In the previous...Ch. 8 - Stock Valuation and PE [LO2] YGTB, Inc., currently...Ch. 8 - PE and Terminal Stock Price [LO2] In practice, a...Ch. 8 - Stock Valuation and PE [LO2] Fly Away, Inc., has...Ch. 8 - Prob. 32QPCh. 8 - Stock Valuation [LO1] Most corporations pay...Ch. 8 - Nonconstant Growth [LO1] Storico Co. just paid a...Ch. 8 - Nonconstant Growth [LO1] This ones a little...Ch. 8 - Constant Dividend Growth Model [LO1] Assume a...Ch. 8 - Two-Stage Dividend Growth [LO1] Regarding the...Ch. 8 - Prob. 38QPCh. 8 - Prob. 1MCh. 8 - Prob. 2MCh. 8 - What is the industry average priceearnings ratio?...Ch. 8 - Prob. 4MCh. 8 - Assume the companys growth rate slows to the...Ch. 8 - Prob. 6M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 1) what is the expected return rate for stock A 2) what is the expected return rate for stock B 3) what is the standard deviation of returns for stock A 4) what is the standard deviation of returns for stock B.arrow_forwardConsider an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?arrow_forwardWe know the following expected returns for stocks A and B, given the different states of the economy: State(s) Probability E(rA,s) E(rB,s) Recession 0.1-0.06 0.04 Normal 0.5 0.09 0.07 Expansion 0.4 0.17 0.11 What is the standard deviation of returns for stock B?arrow_forward
- 5. Given the following expectations for the next year, what is the expected return, standard deviation, and beta of Stock A? Use the excel sheet we covered to find the answer. Returns Probability Stock A Market 0.10 0.05 0.02 0.25 0.09 0.08 0.30 0.13 0.12 0.25 0.19 0.15 0.10 0.21 0.16arrow_forwardSuppose your expectations regarding the stock market are as follows: State of the Economy Boom Normal growth Recession Probability 0.3 0.4 0.3 Mean Standard deviation E (r) Σ=1p(s)r(s) Var (r) = o² = Σ³-1 P (s)[r (s) — E (r)]² - SD (r) = o = √Var (r) Required: Use above equations to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.) 14.00% 23.24% HPR X 2 decimal places required. 44% 14 -16arrow_forwardNow assume that the stock is currently selling at $30.29. What is its expected rate of return?arrow_forward
- The return earned for Asman stock is between time 1 and time 2 is ??? The between time 2 and time 3 is ??? The between time 3 and time 4 is ??? Your investment in Salinas stock yielded an annual rate of return between time 1 and time 2 ??? The between of time 2 and time 3 is ??? The between time 3 and time 4 is ???arrow_forwardConsider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 20 % 28 % 2 8 11 3 16 19 4 4 1 5 2 −9 a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean return? A. ABC B. XYZ c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. If you were equally likely to earn a return of 20%, 8%, 16%, 4%, or 2%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.) e. What if the five possible outcomes were those of stock XYZ? f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance? A. Arithmetic B. Geometricarrow_forwardSuppose the following equation best describes the evolution of β over time: βt = 0.3 + 0.2βt – 1 If a stock had a β of 0.8 last year, you would forecast the β to be _______ in the coming year. A. 0.60 B. 0.94 C. 0.70 D. 0.46arrow_forward
- please give me the corect answerarrow_forwardAssume that you are using the Capital Asset Pricing Model (CAPM) to find the expected return for a share of common stock. Your research shows the following: Beta = βi = 1.54 Risk free rate = Rf = 2.5% per year Market return = E(RM) = 6.5% per year Based on this information, answer the following: A. Based on the beta, how does the stock's risk compare to the market overall? On what do you base your answer? B. Based on the beta, how would you expect the stock's returns to react to a decrease in returns in the market overall? Why? C. According to the CAPM and the information given above, what is the expected return E(Ri) for this stock? D. If the required rate of return on this stock were 7% per year, would you invest? Why or why not?arrow_forwardSuppose your expectations regarding the stock price are as follows: State of the Market Probability Ending Price HPR (including dividends) Boom 0.35 $140 44.5% Normal growth 0.30 110 14.0 Recession 0.35 80 -16.5 Use the following equations to compute the mean and standard deviation of the HPR on stocks:arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Efficient Market Hypothesis - EMH Explained Simply; Author: Learn to Invest - Investors Grow;https://www.youtube.com/watch?v=UTHvfI9awBk;License: Standard Youtube License