## Concept checkers

1. The stock of Western Graphics Co. paid a dividend of $0.40 per share last year on earnings of $ 1.00 per share. The firm's earnings and dividends are expected to grow at 5% per year forever. Shareholders require a return of 12% on their investment. The justified trailing and leading P.'E multiples are closest ro:

Trailing P/E Leading P/E

2. An analyst is valuing an electric utility with a dividend payout ratio of 0.65, a beta of 0.56, and an expected earnings growth rate of 0.032. A regression on other electric utilities produces the following equation:

predicted P/E = 8.57 + (5.38 x dividend payout) + (15 53 x growth) - (0.61 x beta)

The predicted P/E on the basis of the values of the explanatory variables for the company is closest to:

3. Party Favors, Inc. has a leading P/E of 18.75 and a 5-year consensus growth rate forecast of 15.32%. The median PEG, based on leading P/E, for a group of companies comparable in risk to Party Favors, Inc. is 0.92. The stock appears to be:

A. overvalued because its PEG ratio is 0.82.

B. overvalued because its PEG ratio is 1.22.

### C. undervalued because its PEG ratio is 0.82.

4. Consumer Products, Inc. has a Trailing P/E of 27.52, while the median peer group P/E is 33.25. Assuming that there are no differences in the fundamentals among the peer firms and Consumer Products, the firm is:

A. correctly valued.

B. overvalued.

### C. undervalued.

5. Creative Toys recently paid a dividend of $1.35 a share. It has a payout ratio of 67%, a ROE of 23%, and an expected growth rate in earnings and dividends for the foreseeable future of 7.6%. Shareholders require a return of 14% on their investment. The justified price to book value multiple is closest to:

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