Chap 12

CHAPTER 12MACROANALYSIS AND MICROVALUATION OF THE
STOCK MARKET
TRUE/FALSE
1. A main limitation of the NBER indicator series is false signals.
ANS: T PTS: 1
2. Stock prices move coincidentally with the economy.
ANS: F PTS: 1
3. The cyclical indicator approach to market analysis is based on the belief that the economy expands and
contracts in a random manner.
ANS: F PTS: 1
4. Leading indicators of the business cycle include economic series that reach peaks or troughs before the
peaks and troughs of the overall economy.
ANS: T PTS: 1
5. Coincident indicators include economic time series that have peaks and troughs that roughly occur at
the same time as the peaks and troughs of overall economic activity.
ANS: T PTS: 1
6. The economy and the stock market have a strong, consistent relationship, but the stock market
generally turns before the economy does.
ANS: T PTS: 1
7. Diffusion indexes indicate the spread in interest rates between major economies.
ANS: F PTS: 1
8. The economic factor assumed to be closely related to stock prices is productivity.
ANS: F PTS: 1
9. The best known monetary variable is the level of taxes.
ANS: F PTS: 1
10. Recent studies show that money supply changes have an important impact on stock price movements.
ANS: T PTS: 1
11. Recent studies indicate that one can earn excess returns in the stock market by forecasting
unanticipated changes in the money supply.
ANS: T PTS: 1
12. The first step in the Goldman Sachs analysis of world markets examines a country's aggregate
economy and its components that relate to the valuation of securities.
ANS: T PTS: 1
13. The Goldman Sach analysis recommends an allocation of equity investments among countries in
comparison to the country's normal weighting based on its relative market value.
ANS: T PTS: 1
14. It is important to analyze the economies and security markets before analyzing alternative industries or
companies.
ANS: F PTS: 1
15. Over the last 20 years, increases in the return on equity for the S&P Index has been associated with
decreases in return of assets.
ANS: F PTS: 1
16. It is more important to estimate future earnings than the future earnings multiplier.
ANS: F PTS: 1
17. An analysis of U.S. equity markets using the cash flow techniques concludes that the market is not
fully valued.
ANS: F PTS: 1
18. There is a negative relationship between the capacity utilization rate and the profit margin.
ANS: F PTS: 1
19. Estimating net profit margin directly is difficult because it is so volatile.
ANS: T PTS: 1
20. An increase in the required rate of return k will increase the P/E ratio.
ANS: F PTS: 1
21. Future tax rates are difficult to estimate because they are politically influenced.
ANS: T PTS: 1
22. As the market's return on equity increases so will the P/E ratio.
ANS: T PTS: 1
23. It is reasonable to expect corporate sales to be closely related to GNP.
ANS: T PTS: 1
24. Dividend growth is positively related to the return on equity.
ANS: T PTS: 1
25. Changes in the dividend payout ratio are positively related to changes in the retention rate.
ANS: F PTS: 1
26. In well developed economies, markets are not affected by changes in expected inflation.
ANS: F PTS: 1
27. The valuation techniques presented in the chapter can only be applied to the stock market in the United
States, since the U.S. stock market is inefficient.
ANS: F PTS: 1
28. One of the economic series included in the National Bureau of Economic Research (NBER) coincident
indicator is the index of industrial production.
ANS: T PTS: 1
29. A major advantage of the cyclical indicator approach is that it spans all important major economic
sectors including the service sector and import-exports.
ANS: F PTS: 1
30. The University of Michigan Consumer Sentiment Index is an example of a leading indicator.
ANS: T PTS: 1
31. When estimating a major stock market value using the earnings multiplier approach near-term
estimates of the required rate of return and growth rate are essential due to the impact of near-term
events on cash flows.
ANS: F PTS: 1
32. The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in
relative valuation methods.
ANS: T PTS: 1
33. Interest rate spread, 10-year Treasury bonds less federal funds, is listed as a lagging indicator in the
National Bureau of Economic Research (NBER).
ANS: F PTS: 1
34. Building permits for new private housing units are listed as a leading indicator by the National Bureau
of Economic Research (NBER).
ANS: T PTS: 1
35. An increase in the retention ratio will cause a decrease in the growth rate.
ANS: F PTS: 1
MULTIPLE CHOICE
1. The index of leading indicators includes all of the following, except:

a. M2 money supply.
b. S & P 500 index.
c. Orders for plant and equipment.
d. Changes in the sensitive materials price.
e. Index of industrial production.
ANS: D PTS: 1 OBJ: Multiple Choice
2. Which of the following are not cyclical indicators?

a. Selected series
b. Coincident indicators
c. Diffusion indicators
d. Leading indicators
e. Lagging indicators
ANS: C PTS: 1 OBJ: Multiple Choice
3. The U.S. balance of payments, the federal deficit and military contract awards are ____ of aggregate
economic activity.
a. Leading indicators
b. Coincident indicators
c. Lagging indicators
d. Not categorized indicators
e. Not indicators
4. Which of the following series does not include the long-leading index?
a. Dow Jones Industrial Average
b. Dow Jones Bond Prices, Percent Face Value
c. Price to Unit Labor Cost
d. M2 Money Supply, Deflated
e. New Building Permits
ANS: A PTS: 1 OBJ: Multiple Choice
5. Which of the following variables was considered not significant in explaining stock returns?
a. Industrial production
b. Changes in the risk premium
c. Consumption
d. Twists in the yield curve
e. Inflation
6. If a diffusion index for new orders went from 87 to 74 and then to 68, it would indicate ____ receipt of
new orders and indicate a ____ in breadth and the possibility of a future ____ in the series.
a. Limited, strengthening, decline
b. Limited, weakening, increase
c. Widespread, strengthening, increase
d. Widespread, weakening, decline
e. Widespread, weakening, increase
7. The correlation of stock market returns between the U.S. and Japan is ____ and ____.
a. High, increasing.
b. High, decreasing.
c. Low, increasing.
d. Low, decreasing.
e. Low, remaining constant.
8. Which of the following is not an analytical measure used by the NBER to examine behavior within a
series?
a. Diffusion indexes
b. Rates of change
c. Direction of change
d. Ratios among series
e. Comparison with previous cycles
9. Excess liquidity is defined as

a. The year-to year percentage change in the M2 money supply less the year-to-year
percentage change in the nominal GNP.
b. The growth rate in M2 money supply less the growth rate in M1 money supply.
c. The year-to-year percentage change in the M1 money supply less the year-to-year
percentage.
d. The year-to-year percentage change in the "real" GNP less the year-to-year percentage
change in the nominal GNP.
e. None of the above
10. Which of the following is not normally associated with cyclical indicators?
a. The Securities and Exchange Commission (SEC)
b. The National Bureau of Economic Research (NBER)
c. Business Week
d. Center for International Business Cycle Research (CIBCR)
e. All of the above
11. Which of the following is not a reason given for why forecaster are so often incorrect?
a. There is a temptation for economic forecasters to stay fairly close to the "norm," that is,
"group think."
b. Many analysts are simply too short-sighted.
c. Economists and economic forecaster often suffer from information overload.
d. Some economic forecasters are too broad-minded, trying to include a number of ideas in
their forecasts.
e. None of the above (that is, all are reasons cited for why forecasters are often incorrect)
12. Which of the following statements concerning asset allocation is false?
a. Diversification across international boundaries can improve risk-adjusted portfolio returns.
b. Economies expected to grow at an above-average rate with above-average profit growth
should be considered as candidates to overweight in a global portfolio.
c. Severe currency blockages should not impact global diversification selections.
d. Portfolio allocation among asset classes may provide higher portfolio returns while
lowering portfolio risk levels.
e. None of the above (that is, all statements are true).
13. The National Bureau of Economic Research (NBER) has derived the following indicator series in
order to monitor business cycles.
a. M2, leading, and lagging.
b. Leading, coincident, and consumer expectations.
c. Leading, coincident, and lagging.
d. Leading, coincident, and M2.
e. Consumer expectations, leading, and lagging.
14. An examination of the relationship between stock prices and the economy has shown that the
relationship is
a. Weak, and that stock prices turn after the economy does.
b. Nonexistent.
c. Strong, and that stock prices turn after the economy does.
d. Strong, and that stock prices turn before the economy does.
e. Weak, and that stock prices turn before the economy does.
15. Which of the following economic series are included in the NBER leading indicator group?
a. Average weekly hour of production workers.
b. Average weekly initial claims for unemployment insurance.
c. Index of bond prices.
d. a and b.
e. b and c.
16. Which of the following economic series are included in the NBER coincident indicator group?
a. Employees on nonagricultural payrolls.
b. Change in consumer price index for services.
c. Index of consumer expectations.
d. Spread of 10-year Treasury yield less fed funds.
e. Index of stock prices.
17. Which of the following economic series are included in the NBER lagging indicator series?
a. Vendor Performance.
b. Index of industrial production.
c. Manufacturing and trade sales data in 1992 dollars.
d. Manufacturers' new orders, non-defense capital goods.
e. Average duration of unemployment in weeks.
ANS: E PTS: 1 OBJ: Multiple Choice
18. The initial effect of a change in monetary policy appears in ____ and only later in ____.
a. The aggregate economy, financial markets.
b. Financial markets, the aggregate economy.
c. Bond markets, stock markets,
d. Stock markets, bond markets.
e. None of the above.
ANS: B PTS: 1 OBJ: Multiple Choice
19. Jensen, Johnson, and Mercer showed that the relationship between stock returns and size and price-to-
book ratio holds in periods when monetary policy is
a. Neutral.
b. Tight.
c. Easy.
d. All of the above.
20. If interest rates increase due to inflation, but expected cash flows to a firm do not change, then you
would expect stock prices to
a. Rise.
b. Rise and then decline.
c. Remain unchanged.
d. Decline.
21. If interest rates rise due to inflation, and expected cash flows to a firm rise, then you would expect
stock prices to
a. Rise.
b. Rise and then decline.
c. Remain unchanged.
d. Decline.
22. There are three techniques available to help an investor make a market decision. Which of the
following is not such an analysis technique?
a. Macro techniques that are based on the strong relationship between the economy and
security markets.
b. Micro techniques that estimate future market values by applying one of several basic
valuation models to equity markets.
c. Technical analysis where an investor analyzes past and recent market movements for
indications of future performance.
d. Fundamental analysis that considers the effect of market on the entire portfolio.
e. None of the above (that is, all are techniques available to make market decisions)
23. Which of the following is not a factor under the Free Cash Flow to Equity (FCFE) Model?
a. Depreciation expense
b. Capital expenditure
c. Change in working capital
d. Principal debt repayment
e. Earnings multiplier
24. Expected earnings per share estimates requires all of the following except
a. A sales per share estimate.
b. A GDP estimate.
c. An aggregate operating profit margin estimate
d. An estimate of the real risk-free rate.
e. A tax rate estimate.
25. The dividend payout ratio, the required rate of return on common equity, and the expected growth rate
of stock dividends are the major variables that affect
a. The profit margin for the S&P Industrials Index.
b. The earnings multiplier for common stock.
c. Aggregate tax revenues.
d. Capital gains tax revenues.
e. Aggregate GDP.
26. Aggregate return on equity increases as

a. Profit margins increase.
b. Total asset turnover increases.
c. Financial leverage increases.
d. Equity turnover decreases.
e. All of the above.
27. All of the following factors affect the required rate of return except
a. The economy's risk free rate.
b. Corporate business risk.
c. Return on equity.
d. Country risk.
e. Expected rate of inflation.
28. The growth rate (g) of dividends is affected by all of the following except
a. Required return
b. Retention rate
c. Total asset turnover
d. Financial leverage
e. Net profit margin
29. Unit labor costs, the rate of inflation, the level of foreign competition, and the unemployment rate were
variables tested by Finkel and Tuttle as determinants of the
a. Balance of payments.
b. The exchange rate.
c. Aggregate operating profit margin.
d. Aggregate gross profit margin.
e. Aggregate net profit margin.
30. Which of the following is not a determinant of the aggregate gross profit margin?
a. Unit labor costs of production
b. Rate of inflation
c. Unemployment rate
d. Level of foreign competition
e. Growth rate of M2 money supply
31. A microeconomic estimate of the market earnings multiple requires an estimate for which of the
following variables?
a. Dividend payout ratio
b. Return on equity
c. Real RFR
d. All of the above
32. Which of the following economic series is not included in the National Bureau of Economic Research
(NBER) leading indicator group?
a. Average weekly initial claims for unemployment
b. Index of 500 consumer stock prices
c. Real money supply, M2
d. Index of industrial production
e. All of the above are included in the NBER leading indicator group
(NBER) lagging indicator group?
a. Average duration of unemployment
b. Ratio of manufacturing and trade inventories to sales
c. Number of employees on nonagricultural payrolls
d. Percentage change in the labor cost per unit of output in manufacturing
e. All of the above are included in the NBER lagging indicator group
34. The multiplier approach for estimating the intrinsic market value of a major stock market series
requires the following step(s):
a. Estimating the future earnings per share for the stock market series
b. Estimating the appropriate earnings multiplier for the stock market series
c. Estimating long-run required rates of return and growth rates
d. Both a and b
e. All of the above
35. You are attempting to estimate expected earnings per share for a major stock market series. You have
determined an appropriate estimate for sales per share. Which of the following methods can be used to
estimate the profit margin?
a. Base the estimate on recent trends of net profit margins.
b. Estimate the net before tax (NBT) profit margin along with a tax estimate.
c. Incorporate an estimate an operating profit margin, defined as earnings before interest,
taxes, and depreciation.
d. All of the above methods are appropriate.
e. None of the above methods are appropriate.
36. A 1971 study by Finkel and Tuttle hypothesizes that all of the following variables affect the aggregate
profit margin except
a. Capacity utilization rate
b. Unit labor costs
c. Variable labor costs
d. Rate of inflation
e. Foreign competition
(NBER) coincident economic indicator group?
a. Total value of commercial loans
b. Employees on nonagricultural payrolls
c. Personal income less transfer payments
d. Industrial production
e. Manufacturing and trade sales
38. Which of the following is not a major variable that affects the aggregate stock market earning
multiplier in a country?
a. Required rate of return on common stock in the country
b. Expected growth rate of dividends for the stocks in the country
c. Composite dividend-payout ratio for common stocks in country
d. Composite debt to equity ratio for firms in the country
e. All of the above are major variables for a country's aggregate stock market earnings
multiplier
39. The growth rate will most likely increase if the:

a. Retention ratio decreases
b. Payout ratio decreases
c. Return on equity decreases
d. Net income increases
e. Both a and c
40. When applying the earnings multiplier model all of the following will cause the required rate of return,
k, to change except
a. Changes in the real risk free rate
b. Changes in the retention rate
c. Changes in the rate of inflation
d. Changes in the risk premium for common stock
e. All of the above changes will cause a change in the required rate of return
41. If, for the S&P Industrials Index, the profit margin was 0.35 and the equity turnover ratio was 10, the
ROE would be:
a. 0.035%
b. 2.857%
c. 3.500%
d. 28.57%
e. 35.00%
ANS: C
ROE = (Profit Margin) (Equity Turnover) = (0.35)(10) = 3.5
PTS: 1 OBJ: Multiple Choice Problem
ROE would be:
a. 0.033%
b. 3.300%
c. 33.00%
d. 36.70%
e. 333.00%
ANS: B
43. If, for the S&P Industrials Index, the profit margin was .25 and the equity turnover ratio was 12, the
ROE would be:
a. 0.83%
b. 0.48%
c. 3.00%
d. 30.00%
e. 48.00%
ANS: C
ROE would be:
a. 0.026%
b. 2.600%
c. 6.500%
d. 26.00%
e. 65.00%
ANS: B
45. The dividend payout ratio for the aggregate market is 55 percent, the required rate of return is 15
percent, and the expected growth rate for dividends is 7 percent. Compute the current earnings
multiple.
a. 3.93
b. 78.6
c. 6.88
d. 39.3
ANS: C
P/E = Payout (k - g) = .55 (.15 - .07) = 6.88
multiple.
a. 7
b. 13
c. 4.61
d. 14.61
ANS: B
P/E = Payout (k - g) = .65 (.13 - .08) = 13
multiple.
a. 5.41
b. 16.25
c. 6.25
d. 10.83
ANS: D
P/E = Payout (k - g) = .65 (0.12 - .06) = 10.83
multiple.
a. 5
b. 2.81
c. 7.5
d. 4
ANS: A
P/E = Payout (k - g) = .50 (.16 - .06) = 5
Exhibit 12.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that the dividend payout ratio will be 65 percent when the rate on long-term government
bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will
rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.
49. Refer to Exhibit 12.1. What is the expected sustainable growth rate?
a. 2.80%
b. 4.20%
c. 5.25%
d. 7.80%
e. 9.75%
ANS: B
g = (1 - Payout) (ROE) = 0.35 12 = 4.2%
50. Refer to Exhibit 12.1. What is your expectation of the market P/E ratio?
a. 8.33
b. 5.33
c. 9.03
d. 6.02
e. 3.24
ANS: D
P/E = Payout (k - g) = .65 (0.15 - .042) = 6.02
51. Refer to Exhibit 12.1. To what price will the market rise if the earnings expectation is $22.00 per
share?
a. $183.26
b. $132.41
c. $198.66
d. $71.28
e. $14.30
ANS: B
P = P/E EPS = 6.02 22.00 = $132.41
Exhibit 12.2
a. 9.0%
b. 7.2%
c. 6.0%
d. 3.0%
e. 3.6%
ANS: D
g = (1 - Payout) (ROE) = 0.25 .12 = 3%
a. 3.92
b. 6.25
c. 6.67
d. 8.33
e. 12.00
ANS: B
P/E = Payout (k - g) = .75 (0.15 - .048) = 6.25
54. Refer to Exhibit 12.2. To what price will the market rise if the earnings expectation is $32.00?
a. $384.00
b. $266.56
c. $213.44
d. $200.00
e. $125.44
ANS: D
P = P/E EPS = 6.25 32.00 = $200
Exhibit 12.3
a. 5.85
b. 7.15
c. 4.05
d. 6.75
e. 8.25
ANS: A
g = (1 - Payout) (ROE) = 0.45 13 = 5.85%
a. 37.69
b. 24.92
c. 58.15
d. 55.02
e. 47.82
ANS: E
P/E = Payout (k - g) = .55 (0.07 - .0585) = 47.82
a. $138.42
b. $90.36
c. $71.74
d. $105.30
e. $85.14
ANS: C
P = P/E EPS = 47.82 1.5 = $71.74
Exhibit 12.4
Assume that the dividend payout ratio will be 45 percent when the rate on long term government
a. 4.95
b. 7.2
c. 8.8
d. 6.3
e. 7.7
ANS: E
g = (1 - Payout) (ROE) = 0.55 14 = 7.7%
a. 5.42
b. 7.14
c. 6.63
d. 6.25
e. 5.11
ANS: A
P/E = Payout (k - g) = .45 (0.16 - .077) = 5.42
a. $71.40
b. $66.30
c. $54.20
d. $77.00
e. $51.10
ANS: C
P = P/E Earnings = 5.42 10.00 = $54.20
Exhibit 12.5
An analyst wishes to estimate the share price for Ashley Corporation. The following information is
made available:
Estimated profit margin = 15%

Total asset turnover = 2
Financial leverage = 1.2
Estimated dividend payout ratio = 75%
Required rate of return = 14%
Estimated EPS = $2.50
61. Refer to Exhibit 12.5. Calculate the firm's ROE.

a. 36%
b. 25%
c. 15%
d. 10%
e. 8%
ANS: A
ROE = (0.15)(2)(1.2) = 0.36 = 36%
62. Refer to Exhibit 12.5. The firm's sustainable growth rate is

a. 15%
b. 10%
c. 9%
d. 8%
e. 7%
ANS: C
g = (1 - 0.75)(0.36) = 0.09 = 9%
63. Refer to Exhibit 12.5. Calculate the P/E multiple.

a. 35
b. 30
c. 25
d. 20
e. 15
ANS: E
P/E = 0.75/(0.14 - .09) = 15
64. Refer to Exhibit 12.5. Calculate the firm's estimated share price.
a. 57.5
b. 37.5
c. 45
d. 32.75
e. 75
ANS: B
P = (2.5)(15) = $37.5
Exhibit 12.6
Consider the following information that you propose to use to obtain an estimate of year 2004 EPS for
the MacLog Company.
Estimated
Year 2003 Year 2004
GDP 11,000 Billion
GDP growth 3.5%
Sales per share $800
Operating profit margin 12%
Depreciation/Fixed Assets 14%
Fixed asset turnover 2
Interest rate 3.5%
Total asset turnover 0.7
Debt/Total assets 45%
Tax rate 36%
In addition a regression analysis indicates the following relationship between growth in sales per share
for MacLog and GDP growth is
%D Sales per share = 0.015 + 0.75(%D GDP)
65. Refer to Exhibit 12.6. Calculate GDP for the year 2004.
a. $10,500 billion
b. $11,000 billion
c. $11,385 billion
d. $10,550 billion
e. $11,025 billion
ANS: C
GDP year 2004 = (11000)(1 + .035) = $11,385
66. Refer to Exhibit 12.6. Estimate the firm's growth rate in sales per share.
a. 1.5%
b. 2%
c. 2.16%
d. 4.13%
e. 3.73%
ANS: D
growth rate sales per share = .015 + (.75)(.035) = 4.13%
67. Refer to Exhibit 12.6. Estimate the firm's sales per share for the year 2004.
a. $833.04
b. $900.08
c. $885.03
d. $925.56
e. $850.75
ANS: A
Sales per share year 2004 = 800(1 + .0413) = $833.04
68. Refer to Exhibit 12.6. Calculate the firm's year 2004 EBITDA per share.
a. $95.05
b. $87.15
c. $112.56
d. $104.73
e. $99.96
ANS: E
EBITDA per share = (0.12)(833.04) = $99.96
69. Refer to Exhibit 12.6. Obtain an estimate of the per share depreciation charge for the year 2004.
a. $58.31
b. $102.35
c. $53.68
d. $75.93
e. $65.78
ANS: A
FA t/o = 2, Dep/FA = 0.14. Sales = $833.04
FA = 833.04/2 = 416.52
Depreciation = (.14)(416.52) = $58.31

70. Refer to Exhibit 12.6. Calculate the per share EBIT for the year 2004.
a. $35.53
b. $41.65
c. $55.89
d. $65.14
e. $75.10
ANS: B
EBIT per share = 99.96 - 58.31 = $41.65
71. Refer to Exhibit 12.6. Calculate the firm's level of Total Assets per share for the year 2004.
a. $1050.65
b. $1065.67
c. $1113.58
d. $1190.06
e. $1385.77
ANS: D
TA t/o = 0.7, Sales per share = 833.04
TA = 833.04/0.7 = $1190.06
72. Refer to Exhibit 12.6. Calculate the firm's level of debt for the year 2004.
a. $535.53
b. $600.75
c. $637.67
d. $485.98
e. $393.72
ANS: A
Debt/TA = .45
Debt = (1190.06)(.45) = $535.53
73. Refer to Exhibit 12.6. Calculate the per share interest rate charge for the year 2004.
a. $18.74
b. $14.72
c. $30.07
d. $13.76
e. $28.59
ANS: A
Interest charge = (.035)(535.53) = $18.74
74. Refer to Exhibit 12.6. Calculate the firm's EBT per share for the year 2004.
a. $13.29
b. $27.89
c. $18.75
d. $19.63
e. $22.91
ANS: E
EBT = 41.65 - 18.74 = $22.91
75. Refer to Exhibit 12.6. Calculate the firm's EPS for the year 2004.
a. $15.25
b. $14.66
c. $17.25
d. $12.56
e. $18.57
ANS: B
Taxes per share = (22.91)(.36) = $8.25
EPS = 22.91 - 8.25 = $14.66
Exhibit 12.7
You are using the free cash flow to equity (FCFE) technique to analyze U.S. equity market. The
beginning FCFE is $90 and the required rate of return is 10%. Free cash flows are expected to grow at
a 10% rate for the next two years and then grow at a constant rate of 7% forever.
76. Refer to Exhibit 12.7. What will FCFE be three years from now?
a. 108.90
b. 116.52
c. 117.00
d. 119.79
e. 120.21
ANS: B
FCFE3 = 90(1.10)2 (1.07) = 116.52
77. Refer to Exhibit 12.7. What is the estimated value of the U.S. market today using the FCFE approach?
a. 2,852
b. 2,918
c. 3,210
d. 3,390
e. 3,884
ANS: D
78. Refer to Exhibit 12.7. What would the estimated value of the U.S. market be today using the FCFE
approach, if the growth rate was expected to be a constant 8% indefinitely, instead of the 10% and 7%
estimates?
a. 4,500
b. 4,728
c. 4,860
d. 4,923
e. 5,042
ANS: C
79. Compute the current earnings multiple if the dividend payout ratio for the aggregate market is 60
percent, the required rate of return is 11%, and the dividend growth rate is 8%.
a. 15
b. 20
c. 25
d. 30
e. 35
ANS: B
P/E = .60/(.11 - .08) = 20
Exhibit 12.8
As an economist for a research firm you are forecasting the market P/E ratio using the dividend
discount model. Because the economy has been slow for 5 years, you expect the dividend-payout ratio
to be 55%. Long-term government bond rates are at 6% and the equity risk premium is estimated to be
3%. Return on equity (ROE) is estimated to be 11%.
80. Refer to Exhibit 12.8. What is the expected growth rate?

a. 3.00%
b. 3.92%
c. 4.95%
d. 5.27%
e. 6.05%
ANS: C
g = ROE(1 - payout ratio) = 0.11(1 - .55) = .0495
a. 9.17
b. 11.11
c. 13.58
d. 18.33
e. 21.42
ANS: C
P/E = payout ratio/(k - g) = .55/(.06 + .03 - .0495) = .55/.0405 = 13.58
Exhibit 12.9
The aggregate market currently has a retention ratio of 60 percent, a required rate of return of 12
percent, and an expected growth rate for dividends of 4 percent.
82. Refer to Exhibit 12.9. What is the current earnings multiplier?

a. 2.5
b. 5.0
c. 7.5
d. 10.0
e. 12.5
ANS: B
payout ratio = 1 - retention ratio = 1 - .60 = .40
P/E = payout ratio/(k - g) = 0.40/(0.12 - 0.04) = 0.40/0.08 = 5.0
83. Refer to Exhibit 12.9. If the payout ratio changes to 50 percent, but there are no other changes, what
will be the new P/E?
a. 3.25
b. 4.16
c. 5.75
d. 6.25
e. 7.67
ANS: D
84. Refer to Exhibit 12.9. Starting with the initial conditions, you expect the retention ratio to be constant,
the rate of inflation to decline by 2 percent, and the growth rate to decline by 1 percent. What is the
expected P/E?
a. 8.57
b. 8.00
c. 6.67
d. 5.71
e. 5.00
ANS: D
85. Refer to Exhibit 12.9. Starting with the initial conditions, you expect the retention ratio to be constant,
the rate of inflation to increase by 2 percent, and the growth rate to increase by 1 percent. What is the
expected P/E?
a. 4.44
b. 5.00
c. 5.71
d. 6.67
e. 8.00
ANS: A

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CHAPTER 12MACROANALYSIS AND MICROVALUATION OF THE

1. A main limitation of the NBER indicator series is false signals.

2. Stock prices move coincidentally with the economy.

8. The economic factor assumed to be closely related to stock prices is productivity.

9. The best known monetary variable is the level of taxes.

19. Estimating net profit margin directly is difficult because it is so volatile.

23. It is reasonable to expect corporate sales to be closely related to GNP.

1. The index of leading indicators includes all of the following, except:

2. Which of the following are not cyclical indicators?

9. Excess liquidity is defined as

26. Aggregate return on equity increases as

39. The growth rate will most likely increase if the:

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

Estimated profit margin = 15%

61. Refer to Exhibit 12.5. Calculate the firm's ROE.

PTS: 1 OBJ: Multiple Choice Problem

62. Refer to Exhibit 12.5. The firm's sustainable growth rate is

PTS: 1 OBJ: Multiple Choice Problem

63. Refer to Exhibit 12.5. Calculate the P/E multiple.

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

%D Sales per share = 0.015 + 0.75(%D GDP)

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

Depreciation = (.14)(416.52) = $58.31

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

Debt = (1190.06)(.45) = $535.53

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

EPS = 22.91 - 8.25 = $14.66

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

80. Refer to Exhibit 12.8. What is the expected growth rate?

PTS: 1 OBJ: Multiple Choice Problem

PTS: 1 OBJ: Multiple Choice Problem

82. Refer to Exhibit 12.9. What is the current earnings multiplier?

P/E = payout ratio/(k - g) = 0.40/(0.12 - 0.04) = 0.40/0.08 = 5.0

PTS: 1 OBJ: Multiple Choice Problem