Posted: February 6th, 2022

**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”.**

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