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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 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

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