Assignment 08 F04 Investments Directions: Be sure to make an electronic copy of
ID: 2774195 • Letter: A
Question
Assignment 08
F04 Investments
Directions: Be sure to make an electronic copy of your answer before submitting it to Ashworth College for grading. Unless otherwise stated, answer in complete sentences, and be sure to use correct English spelling and grammar. Sources must be cited in APA format. Your response should be four (4) double-spaced pages in length; refer to the "Format Requirements" page for specific format requirements.
Give real-world examples whenever possible. Please show all of your work, including all formulas used, if the question requires calculations.
3. Use the chart below and write the calculations that demonstrate the values requested.
AssCombining information from the S&P reports and some estimated data, the following calendar-year data, on a per-share basis, are provided:
Year
Price
Range
Low High
Earnings
Dividends
Book
Value
(D/E)
100(%)
Annual
Avg. P/E
ROE =
E/Book
TR%
1999
$26.5-$35.3
$4.56
$1.72
$25.98
37.7
7.0
17.6%
2000
28.3-37.0
5.02
1.95
29.15
38.8
6.2
17.3
2001
23.5-34.3
5.14
2.20
32.11
42.8
5.8
16.0
2002
27.8-35.0
4.47
2.20
30.86
7.7
2003
29.0-47.8
5.73
2.30
30.30
6.8
2004
36.6-53.5
6.75
2.40
39.85
2005
6.75
2.60
44.00
a. Calculate the D/E, ROE, and TR for 2002, 2003, and 2004. (Use the average of the low and high prices to calculate TRs.)
b. Show that from 2000 through 2004 the per annum growth rate in dividends was 6.9 percent and for earnings was 8.2 percent.
c. Using the current price of $47, with estimated earnings for 2005 of $6.75, show that the P/E would be evaluated as 6.96.
d. On the basis of the annual average P/E ratios shown above and your estimate in Problem c, assume an expected P/E of 7. If an investor expected the earnings of GF for 2005 to be $7.50, show that the intrinsic value would be $52.50.
4. Describe a bar chart and a point-and-figure chart and give the purposes of each.
Year
Price
Range
Low High
Earnings
Dividends
Book
Value
(D/E)
100(%)
Annual
Avg. P/E
ROE =
E/Book
TR%
1999
$26.5-$35.3
$4.56
$1.72
$25.98
37.7
7.0
17.6%
2000
28.3-37.0
5.02
1.95
29.15
38.8
6.2
17.3
2001
23.5-34.3
5.14
2.20
32.11
42.8
5.8
16.0
2002
27.8-35.0
4.47
2.20
30.86
7.7
2003
29.0-47.8
5.73
2.30
30.30
6.8
2004
36.6-53.5
6.75
2.40
39.85
2005
6.75
2.60
44.00
Explanation / Answer
a.
Year 2002
Average price for 2002=High price+Low price/12=27.8+35/12=30.72
D/E ratio(Dividend to earnings ratio)=Dividend/Earnings=2.20/4.47*100=49.22%
ROE=Return on equity=Earnings/Book value of equity=4.47/30.86=14.48%
Year 2003
Average price for 2003=High price+Low price/12=29+47.8/12=32.98
D/E ratio(Dividend to earnings ratio)=Dividend/Earnings=2.30/5.73*100=40.13%
ROE=Return on equity=Earnings/Book value of equity=5.73/30.30=18.91%
Year 2004
Average price for 2004=High price+Low price/12=36.6+53.5/12=41.05
D/E ratio(Dividend to earnings ratio)=Dividend/Earnings=2.40/6.75*100=35.55%
Average annual P/E ratio=Price earnings ratio=Market price/Earnings=6.08
ROE=Return on equity=Earnings/Book value of equity=6.75/39.85=16.93%
Year 2005
Current price=$47
D/E ratio(Dividend to earnings ratio)=Dividend/Earnings=2.60/6.75*100=38.51%
Average annual P/E ratio=Price earnings ratio=Market price/Earnings=47/6.75=6.96
ROE=Return on equity=Earnings/Book value of equity=6.75/44=15.34%
b.
Annual growth rate in dividends and earnings from 2000-2004
Growth rate = (Ending Value - Beginning Value) / Beginning Value
What it is:
The average annual growth rate (AAGR) is the arithmetic mean of a series of growth rates.
How it works/Example:
The formula for AAGR is:
AAGR = (Growth Rate in Period A + Growth Rate in Period B + Growth Rate in Period C + ...Growth Rate in Period X) / Number of Periods
a.Growth rate of earnings
Growth rate of earnings from 2000-2001=Earnings in 2001-Earnings in 2000/Earnings in 2000=(5.14-5.02)/5.02=4.14
Growth rate of earnings from 2001-2002=(4.47-5.14)/4.47=-3.47
Growth rate of earnings from 2002-2003=(5.73-4.47)/4.47=4.73
Growth rate of earnings from 2003-2004=(6.75-5.73)/5.73=5.75
Average annual growth rate of dividends=(4.14-3.47+4.73+5.75)/4
b.Growth rate of dividends
Growth rate of dividends from 2000-2001=(2.20-1.95)/1.95=1.2
Growth rate of dividends from 2001-2002=(2.20-2.20)/2.20=0
Growth rate of dividends from 2002-2003=(2.30-2.20)/2.20=1.3
Growth rate of dividends from 2003-2004=(2.40-2.30)/2.30=1.4
c.Year 2005
Assuming the current price of $47 and estimated earnings of 6.75,show that the Price earnings ratio will be evaluated as 6.96.
Average annual P/E ratio=Price earnings ratio=Market price/Earnings=47/6.75=6.96
d.