Compute value-to-book ratio under each of sets of assumption

Assignment Help Financial Accounting

Reference no: EM13902027

SENSITIVITY OF THE THEORETICAL MODELS OF VALUE- EARNINGS AND VALUE-TO-BOOK TO CHANGES IN ASSUMPTIONS. This problem explores the sensitivity of the value-earnings and value-to-book models to changes in underlying assumptions. We recommend that you design a computer spread- sheet to perform the calculations, particularly for the value-to-book ratio.

Required

a. Assume that current period earnings per share were $1.00 for each of the following scenarios. Compute the value-earnings ratio based on projected one-year-ahead earnings under each of the following sets of assumptions:

Scenario	Cost of Equity Capital	Growth Rate in Earnings
A	0.15	0.06
B	0.15	0.08
C	0.15	0.10
D	0.13	0.06
E	0.13	0.08
F	0.13	0.10
G	0.11	0.06
H	0.11	0.08
I	0.11	0.10

b. Assess the sensitivity of the value-earnings ratio to changes in the cost of equity capital and changes in the growth rate.

c. Compute the value-to-book ratio under each of the following sets of assumptions. Assume zero abnormal ROCE in the periods following the number of years of excess earnings.

Scenario	ROCE	Cost of Equity Capital	Dividend Payout Percentage	Years of Excess Earnings
A	0.20	0.13	0.30	10
B	0.18	0.13	0.30	10
C	0.14	0.13	0.30	10
D	0.18	0.15	0.30	10
E	0.18	0.11	0.30	10
F	0.18	0.13	0.40	10
G	0.18	0.13	0.20	10
H	0.18	0.13	0.30	15
I	0.18	0.13	0.30	20

d. Assess the sensitivity of the value-to-book ratio to changes in the assumptions made about the various underlying variables.

Reference no: EM13902027

Questions Cloud

What does this imply about the median of the salaries : What does this imply about the median of the salaries at company A with regard to the median of the salaries at company B?

Compute the coca-colas value-to-book ratio : Computing Coca-Cola's Value-to-Book Ratio Using the Value-to-Book Valuation Approach. Use the CAPM to compute the required rate of return on common equity capital for Coca-Cola.

What are three reasons why so many unions : What are three reasons why so many unions, both affiliated with the AFL-CIO and amalgamated ones, have merged with other unions in recent years, and cite examples of these mergers? Your response should be at least 200 words in length. ID info used.

Compute the required rate of return on common equity capital : Use the CAPM to compute the required rate of return on common equity capital for Enron. What do these analyses suggest about investing in Enron's shares at a price of $83?

Compute value-to-book ratio under each of sets of assumption : Compute the value-to-book ratio under each of the following sets of assumptions. Assume zero abnormal ROCE in the periods following the number of years of excess earnings.

List and explain the various duties of the national union : List and explain the various duties of the national union president and executive board members, and illustrate how their remuneration is not always considered "fair compensation" as compared to their CEO-counterpart in the U.S. corporations. Your re..

A national union convention : What are activities that are carried out at a national union convention, and why does this type of venue allow for the democratic process to have an opportunity of working? Your response should be at least 200 words in length. ID info. used.

Find the sample standard deviation of these percentages : The following are the percentages of ash content in 12 samples of coal found in close proximity:9.2, 14.1, 9.8, 12.4, 16.0, 12.6, 22.7, 18.9, 21.0, 14.5, 20.4, 16.9- Find the sample mean

Explain the advantage and disadvantage of using virtual team : Explain the advantages and disadvantages of using virtual teams

User Account

All Pages