University:
CFA Institute
Course:
CFA Level 2 - Equity
Academic year:

2023
Views:

19

Pages:

2
Author:

anon

CFA Level 2 - Equity Session 12-Reading 45 Residual Income Valuation-LOS g (Practice Questions, Sample Questions) 1. An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/B) ratio of 6.00. Return on equity (ROE) is expected to be 13%, current book value per share is $13.00, and the cost of equity is 11%. What growth rate is implied by the current P/B rate? A) 0.40%. B) 11.00%. C) 10.60% {Explanation: The P/B ratio of 6.00 and the current book value per share of $13.00 imply a current market price of $78.00. This implies a growth rate of: g = r – [{B0(ROE – r)} / {V0 – B0}] = 0.11 – [{13.00(0.13 – 0.11)} / {78.00 – 13.00}] = 0.1060 = 10.60%. Note that the reading in the curriculum does not provide this expression directly} 2. An investor is considering the purchase of Microscopics, which has a price to book value (P/B) ratio of 4.00. Return on equity (ROE) is expected to be 12%, current book value per share is $12.00, and the cost of equity is 10%. What growth rate is implied by the current P/B rate? A) 9.33%. B) 10.00%. C) 0.67% {Explanation: The P/B ratio of 4.00 and the current book value per share of $12.00 imply a current market price of $48.00. This implies a growth rate of: g = r – [{B0(ROE – r)} / {V0 – B0}] = 0.10 – [{12.00(0.12 – 0.10)} / {48.00 – 12.00}] = 0.0933 = 9.33%. Note that the reading in the curriculum does not provide this expression directly} 3. An analyst is considering the purchase of Delphos Machinery, which has a price-to-book value (P/B) ratio of 8.00. Return on equity (ROE) is expected to be 14%, current book value per share is $12.00, and the cost of equity is 11%. What growth rate is implied by the current P/B rate? A) 8.43%. B) 10.57%. C) 11.00% {Explanation: The P/B ratio of 8.00 and the current book value per share of $12.00 imply a current market price of $96.00. This implies a growth rate of: g = r ? [B0(ROE ? r)] / (V0 ? B0) = 0.11 ? [12.00(0.14 ? 0.11)] / (96.00 ? 12.00) = 0.1057 = 10.57%. (Note: the reading in the curriculum does not provide this expression directly.)}