FIN630 GDB no 02 Solution spring 1 june 2011

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Solution:


1. PE ratio for Company A =14.28571

2. PE ratio for Company B =9.375

3. According to Morningstar classification which Company’s stock is value stock = Company B Stock is a Value Stock

4. According to Morningstar classification which Company’s stock is growth stock =Company A Stock is a Growth Stock


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1. PE ratio for Company A = 14.29

2. PE ratio for Company B = 9.38

3. According to Morningstar classification which Company’s stock is value stock = Company B
4. According to Morningstar classification which Company’s stock is growth stock =Company A
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1.PE ratio for Company A = 14.29

2. PE ratio for Company B =9.375

3. According to Morningstar classification which Company’s stock is value
stock = Company B Stock is a Value Stock

4. According to Morningstar classification which Company’s stock is growth
stock =Company A Stock is a Growth Stock
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Solution Details:
Company A has net income of Rs.560 million; company has 40 million outstanding
shares which are currently trading at Rs.200 per share.
Company B has net income of Rs.480 million; company has 30 million outstanding
shares which are currently trading at Rs.150 per share.
1) What is PE ratio for Company A?
PE = market price per share / earning per share
Earning per share, EPS = net income – dividends on preferred stock
Average outstanding shares
=560 / 40
= 14
PE = 200 / 14 = 14.2857


2) What is PE ratio for Company B?
PE = market price per share / earning per share
Earning per share, EPS = net income – dividends on preferred stock
Average outstanding shares
= 480 / 30
= 16
PE = 150 / 16
= 9.375
3) According to Morningstar classification (based on Magic number) which
Company’s stock is value stock?
4) According to Morningstar classification (based on Magic number) which
Company’s stock is Growth stock?
Company A has Relative PE ratio of 1.1 times and Relative Price to Book ratio of
1.25 times.
If Magic number is > 2.25 then Stock is Growth Stock
If magic Number < 1.75 then Stock is value stock
Magic Number = Relative PE + Relative Price to Book ratio
= 1.1 + 1.25
= 2.35
Magic number > 2.25 so Company A is Growth Stock
Company B has Relative PE ratio of 1 times and Relative Price to Book ratio of 0.50
times.
Magic Number = Relative PE + Relative Price to Book ratio
= 1 + 0.50
= 1.50


Magic number < 1.75 so Company B is Value Stock