(Adapted from 2001 CFA Level I1 exam) Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathers the information given in Exhibit 20-1 to help in his analysis.
EXHIBIT 20-1 Fundamental industry and Market Data
Forecasted industry earnings retention rate
40%
Forecasted industry return on equity
25%
Industry beta
1.2
Government bond yield
6%
Equity risk premium
5%
A. Compute the price to earnings (Po/EI) ratio for the industry based on the fundamental data in Exhibit 20-1. Show your work. Jones wants to analyze how fundamental PIES might differ among countries. He gathers the data given in Exhibit 20-2:
EXHIBIT 20-2 Economic and Market Data
Fundamental Factors
Country A
Country B
Forecasted growth in real gross domestic product
2%
10%
4%
B. Determine whether each of the fundamental factors in Exhibit 20-2 would cause PIES to be generally higher for Country A or higher for Country B. Justify each of your conclusions with one reason. Note: Consider each fundamental factor in isolation, with all else remaining equal.
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