solution manual for 《investment analysis and portfolio management》 ch13.doc

CHAPTER 13STOCK MARKET ANALYSIS1. Although corporate earnings may rise by 12 percent next year, that information by itself is not sufficient to forecast an increase in the stock market. The market level is a product of both corporate earnings and the earnings multiple. The earnings multiple must likewise be projected since it is not stable over time.2. Student Exercise3. The investor can improve his net profit margin estimate by working from the gross margin down to the net profit margin. By this procedure, the investor explicitly considers each major component that affects the net profit margin. This level of analysis provides insights into the components which do not behave consistently over time. Also, the gross profit margin should be easier to estimate since it has the lowest level of relative variability.4. The effect of a decline in capacity utilization should be a decline in the aggregate profit margin, all else the same, because it will mean greater overhead and depreciation per unit of output. Also more fixed financial charges per unit.5. The increase in hourly wages of 6 percent will, all else held equal, cause the operating margin to decrease. In addition to the estimate of the changes in the hourly wage rate, an estimate of the productivity rate change is also needed to forecast the unit labor cost change. The relationship is: % D Hourly Wages % D Productivity = % D Unit Labor Cost6. 7.0 5.0 = 2.0% increase in the unit labor cost. The unit labor cost is negatively related to the profit margin. This increase would, holding other factors constant, decrease the aggregate profit margin. Because it is a low rate of increase, the effect on the profit margin should be small.7.7(a).An increase in the ROE with no other changes should cause an increase in the multiple because it would imply a higher growth rate. An important question is, how was the increase in ROE accomplished? If it was due to operating factors (higher asset turnover or profit margin) it is positive. If it was due to an increase in financial leverage, there could be some offset due to an increase in the required rate of return (k).7(b).Increase, because this will increase earnings growth by raising equity turnover. It could also cause a decrease because it will increase the financial risk and, thus, the required k.7(c).Decrease, because this will increase growth and therefore raise the real RFR. It could also reduce inflation, which would decrease the nominal RFR, causing the multiplier to rise.7(d).Increase, because a decrease in the dividend payout rate increases the retention rate, raising the growth rate. It could also cause a decrease because it reduces the next period's dividends.8. Both the present value of cash flow approaches and the relative valuation ratios approach require two factors be estimated: (1) required rate of return on the stock, because this rate becomes the discount rate or is a major component of the discount rate, and (2) growth rate of the variable used in the valuation techniques, such as, dividends, earnings, cash flows or sales.9. The DDM assumes that (1) dividends grow at a constant rate, (2) the constant growth rate will continue for an infinite period, and (3) the required rate of return (k) is greater than the infinite growth rate (g). Therefore, the infinite period DDM cannot be applied to the valuation of stock for growth companies because the high growth of earnings for the growth company is inconsistent with the assumptions of the infinite period constant growth DDM model. A company cannot permanently maintain a growth rate higher than its required rate of return, because competition will eventually enter this apparently lucrative business, which will reduce the firms profit margins and therefore its ROE and growth rate. Therefore, after a few years of exceptional growth (a period of temporary supernormal growth) a firms growth rate is expected to decline. Eventually its growth rate is expected to stabilize at a constant level consistent with the assumptions of the infinite period DDM. 10. Nominal GDP growth is equal to real GDP growth plus the rate of inflation. From Exhibit 13.27, we find nominal GDP for the United Kingdom for 2003 can be estimated as 2.8% (real GDP) + 2.6% (inflation) = 5.4%. For Japan, the estimate is 1.0% + (-0.7%) = 0.3%.11. The nominal rate of interest is approximately the expected real rate of interest plus the expected rate of inflation. Further, the real rate of interest can be approximated by the expected real growth rate in GDP. From the numbers in Exhibits 13.27 and 13.29, we see that the United States has a higher real growth rate, both currently and forecasted, as well as a higher expected rate of inflation than Japan. Both factors help explain the higher current interest rate in the U.S. relative to Japan. CHAPTER 13Answers to Problems1. Using only the graph and drawing a line over from ten percent to the line of best fit and down to the horizontal percent change indicates an estimate of slightly under 10% for the S & P series. Alternatively, if you apply the following regression equation:% D S&P Industrials Sales = -.024 + 1.16 (% D in Nominal GDP) = -.024 + 1.16 (0.10) = -.024 + .116 = .092 or 9.2% Exhibit 13.10 was based upon an analysis that encompassed the period: 1975-2000. The overall average GDP percentage change was 7.4%, with 6.3% change in S&P Industrials. During the 1990s, the percentage change in GDP was lower than the average over the period (approximately 5.5%) and lower than the 10% proposed in the problem. Therefore, one could argue that based upon recent observations, the percentage change in S&P 400 Sales should also be lower:%D S&P Industrials Sales= -.024 + 1.16x.055= -.024 + .0638= 3.98%2(a).60 P/E = = .60/.06 = 10x .13 .072(b). .50P/E= = .50/.06 =8.3x .13 .072(c).60 P/E= = .60/.07 =8.57x .16 .092(d).60P/E= = .60/.04 =15x .10 .063. CFA Examination I (1985)3(a). Overall, both managers added value by mitigating the currency effects present in the Index. Both exhibited an ability to “pick stocks” in the markets they chose to be in (Manager B in particular). Manager B used his opportunities not to be in stocks quite effectively (via the cash/bond contribution to return), but neither of them matched the passive index in picking the country markets in which to be invested (Manger B, in particular). MANAGER A MANAGER BSTRENGTHS Currency ManagementCurrency Management Stock Selection Use of Cash/Bond FlexibilityWEAKNESSESCountry Selection Country Selection(to a limited degree)3(b). The column reveals the effect on performance in local currency terms after adjustment for movements in the U.S. dollar and, therefore, the effect on the portfolio. Currency gains/losses arise from translating changes in currency exchange rates versus the U.S. dollar over the measuring period (3 years in this case) into U.S. dollars for the U.S. pension plan. The Index mix lost 12.9% to the dollar, reducing what would otherwise have been a very favorable return from the various country markets of 19.9% to a net return of only 7.0%.4(a).Growth = .60 x .12 =.072 =7.2%4(b). .40P/E = =14.29x .10 .0724(c). The market price will rise to: Price = 14.29 x $53 = $757.37 757.14 950 + 304(d). Rate of Return = =17.14% 9505(a). $850 x .152=$129.20 (operating profit margin)$129.20 $38=$ 91.20 (depreciation)$91.20 $16=$ 75.20 (interest)$75.20 x (1.32)=$ 51.14 (Estimated EPS)5(b). Optimistic:$850 x .155=$131.75 (operating profit margin)$131.75 $38= $ 93.75 (depreciation)$93.75 $16= $ 77.75 (interest)$77.75x (1 .32)= $ 52.87 (Estimated EPS)Pessimistic:$850 x .149=$126.65 (operating profit margin)$126.65 $38= $ 88.65 (depreciation)$88.65 $16= $ 72.65 (interest)$72.65 x (1 .32)= $ 49.40 (Estimated EPS)6(a).Growth Rates:Required return:High = (1 - 0.45) x 0.16 = .088 High = 0.08 + 0.03 = 0.11Low = (1 - 0.65) x 0.10 = .035Low = 0.10 + 0.05 = 0.15Consensus = (1 - 0.55) x 0.13 = .0585Consensus = 0.09 + 0.04 = 0.13 P/E Ratios:High = 0.45/(0.11 0.088) = 0.45/.022 = 20.4545Low = 0.65/(0.15 0.035) = 0.65/.115 = 5.6522Consensus = 0.55/(0.13 0.0585) = 0.55/.0715 = 7.6923待添加的隐藏文字内容1Price:High = 52.87 x 20.4545 = $ 1081.43Low = 49.40 x 5.6522 = $ 279.22Consensus = 51.14 x 7.6923 = $ 393.386(b).High = (1081.43/1600) 1 = -.3241Low = (279.22/1600) 1 = -.8255Consensus= (393.38/1600) 1 = .7541Given that large losses are expected, one should underweight the U.S. stocks in a global portfolio. 7.7(a).FCFE0 = $40FCFE1 = $40x(1.09) = $43.60FCFE2 = $40x(1.09)2= $47.52FCFE3 = $40x(1.09)3= $51.80FCFE4 = $51.80x(1.08)= $55.94FCFE5 = $51.80x(1.08)2= $60.42FCFE6 = $51.80x(1.08)3 = $65.25FCFE7 = $65.25x(1.07) = $69.82Value at time t = 0:If the current value of the Index were 1,600, one would overweight the U.S. equity market in the portfolio.7(b).A one percent increase in the rate of inflation would have two possible effects: One, the required return would increase from 9% to 10%, decreasing the value; and two, the nominal cash flow growth rates would increase for all time periods by one percentage point. If both effects are at work, they would cancel each other out, as the increase in free cash flow is discounted back at an equivalently higher discount rate.