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14. National City Corporation, a bank holding company, reported earnings per share of
$2.40 in 1993, and paid dividends per share of $1.06. The earnings had grown 7.5% a
year over the prior five years, and were expected to grow 6% a year in the long term
(starting in 1994). The stock had a beta of 1.05 and traded for ten times earnings. The
treasury bond rate was 7%.
a. Estimate the P/E Ratio for National City Corporation.
b. What long term growth rate is implied in the firm™s current PE ratio?

15. The following were the P/E ratios of firms in the aerospace/defense industry at the
end of December, 1998, with additional data on expected growth and risk:
Company P/E Ratio Expected Beta Payout
Growth
Boeing 17.3 3.5% 1.10 28%
General Dynamics 15.5 11.5% 1.25 40%
General Motors - Hughes 16.5 13.0% 0.85 41%
Grumman 11.4 10.5% 0.80 37%
Lockheed Corporation 10.2 9.5% 0.85 37%
Logicon 12.4 14.0% 0.85 11%
Loral Corporation 13.3 16.5% 0.75 23%
Martin Marietta 11.0 8.0% 0.85 22%
McDonnell Douglas 22.6 13.0% 1.15 37%


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Northrop 9.5 9.0% 1.05 47%
Raytheon 12.1 9.5% 0.75 28%
Rockwell 13.9 11.5% 1.00 38%
Thiokol 8.7 5.5% 0.95 15%
United Industrial 10.4 4.5% 0.70 50%

a. Estimate the average and median P/E ratios. What, if anything, would these averages
tell you?
b. An analyst concludes that Thiokol is undervalued, because its P/E ratio is lower than
the industry average. Under what conditions is this statement true? Would you agree
with it here?
c. Using the PEG ratio, assess whether Thiokol is under valued. What are you assuming
about the relationship between value and growth, when you use PEG ratios?
c. Using a regression, control for differences across firms on risk, growth, and payout.
Specify how you would use this regression to spot under and overvalued stocks. What
are the limitations of this approach?

16. NCH Corporation, which markets cleaning chemicals, insecticides and other
products, paid dividends of $2.00 per share in 1993 on earnings of $4.00 per share. The
book value of equity per share was $40.00, and earnings are expected to grow 6% a year
in the long term. The stock has a beta of 0.85, and sells for $60 per share. The treasury
bond rate is 7%.
a. Based upon these inputs, estimate the price/book value ratio for NCH.
b. How much would the return on equity have to increase to justify the price/book value
ratio at which NCH sells for currently?

17. You are trying to estimate a price per share on an initial public offering of a company
involved in environmental waste disposal. The company has a book value per share of
$20 and earned $3.50 per share in the most recent time period. While it does not pay
dividends, the capital expenditures per share were $2.50 higher than depreciation per
share in the most recent period, and the firm uses no debt financing. Analysts project that




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earnings for the company will grow 25% a year for the next five years. You have data on
other companies in the environment waste disposal business:
Company Price BV/Share EPS DPS Beta Exp.Growth
Air & Water $9.60 $8.48 $0.40 $0.00 1.65 10.5%
Allwaste $5.40 $3.10 $0.25 $0.00 1.10 18.5%
Browning Ferris $29.00 $11.50 $1.45 $0.68 1.25 11.0%
Chemical Waste $9.40 $3.75 $0.45 $0.15 1.15 2.5%
Groundwater $15.00 $14.45 $0.65 $0.00 1.00 3.0%
Intn'l Tech. $3.30 $3.35 $0.16 $0.00 1.10 11.0%
Ionics Inc. $48.00 $31.00 $2.20 $0.00 1.00 14.5%
Laidlaw Inc. $6.30 $5.85 $0.40 $0.12 1.15 8.5%
OHM Corp. $16.00 $5.65 $0.60 $0.00 1.15 9.50%
Rollins $5.10 $3.65 $0.05 $0.00 1.30 1.0%
Safety-Kleen $14.00 $9.25 $0.80 $0.36 1.15 6.50%
The average debt/equity ratio of these firms is 20%, and the tax rate is 40%.
a. Estimate the average price/book value ratio for these comparable firms. Would you
use this average P/BV ratio to price the initial public offering.
b. What subjective adjustments would you make to the price/book value ratio for this
firm and why?

18. Longs Drug, a large U.S. drugstore chain operating primarily in Northern California,
had sales per share of $122 in 1993, on which it reported earnings per share of $2.45 and
paid a dividend per share of $1.12. The company is expected to grow 6% in the long
term, and has a beta of 0.90. The current T.Bond rate is 7%.
a. Estimate the appropriate price/sales multiple for Longs Drug.
b. The stock is currently trading for $34 per share. Assuming the growth rate is
estimated correctly, what would the profit margin need to be to justify this price per
share.

19. You have been asked to assess whether Walgreen Company, a drugstore chain, is
correctly priced relative to its competitors in the drugstore industry at the end of 1993.




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The following are the price/sales ratios, profit margins, and other relative details of the
firms in the drugstore industry.
Company P/S Ratio Profit Margin Payout Expected Growth Beta
Arbor Drugs 0.42 3.40% 18% 14.0% 1.05
Big B Inc. 0.30 1.90% 14% 23.5% 0.70
Drug Empor. 0.10 0.60% 0% 27.5% 0.90
Fay's Inc. 0.15 1.30% 37% 11.5% 0.90
Genovese 0.18 1.70% 26% 10.5% 0.80
Longs Drug 0.30 2.00% 46% 6.0% 0.90
Perry Drugs 0.12 1.30% 0% 12.5% 1.10
Rite Aid 0.33 3.20% 37% 10.5% 0.90
Walgreen 0.60 2.70% 31% 13.5% 1.15
Based entirely on a subjective analysis, do you think that Walgreen is overpriced because
its price/sales ratio is the highest in the industry? If it is not, how would you rationalize
its value?

20. Time Warner is considering a sale of its publishing division. The division had
earnings before interest, taxes and depreciation of $ 550 million in the most recent year
(depreciation was $ 150 million), growing at an estimated 5% a year (You can assume
that depreciation grows at the same rate). The return on capital in the division is 15%, and
the corporate tax rate is 40%. If the cost of capital for the division is 9%, estimate the
following:
a. Value/FCFF multiple
b. Value/EBIT multiple
c. Value/EBITDA multiple




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