FIN 3005 FIN3005 Week 3 – Part 1 – Everest College

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FIN 3005 FIN3005 Week 3 – Part 1 – Everest College

Part 1

1.Price-Earnings Model

Explain the use of the price-earnings ratio for valuing astock. Why might investors derive different valuations for a stock when using thePE method? Why might investors derive an inaccurate valuation of a firm whenusing the PE method?

2.Dividend Discount Model

Describe the dividend discount valuation model. Whatare some limitations of the dividend discount model?

3.Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production.

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FIN 3005 FIN3005 Week 3 – Part 1 – Everest College

Part 1

1.Price-Earnings Model

Explain the use of the price-earnings ratio for valuing astock. Why might investors derive different valuations for a stock when using thePE method? Why might investors derive an inaccurate valuation of a firm whenusing the PE method?

2.Dividend Discount Model

Describe the dividend discount valuation model. Whatare some limitations of the dividend discount model?

3.Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production.

Recall that the yield curve is currently upward sloping. Also recallthat Carson is concerned about a possible slowing of the economy because ofpotential Fed actions to reduce inflation. It is also considering issuing stock orbonds to raise funds in the next year.

If Carson goes public, it might even considerusing its stock as a means of acquiring some target firms. It would also considerengaging in a secondary offering at a future point in time if the IPO is successfuland if its growth continues over time.

It would also change its compensationsystem so that most of its managers would receive about 30 percent of theircompensation in shares of Carson stock and the remainder as salary.

a.At the present time, the price–earnings ratio (stock price per sharedivided by earnings per share) of other firms in Carson’s industry isrelatively low but should rise in the future. Why might this information affect the time at which Carson issues its stock?

FIN 3005 FIN3005 Week 3 – Part 1 – Everest College

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FIN 3005 FIN3005 Week 3 – Part 1 – Everest College

How could a bank generate higher income before tax (as a percentage of assets) when its net interest margin has decreased? 1 2 3 4 5 Assume a savings institution has a large amount of fixed-rate mortgages and obtains most of its funds from short-term deposits. How could it use options on 1 2 3 4 5

Leverage of Options. How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet 1 2 3 4 5 If you were a major shareholder of a publicly traded firm, would you prefer that stock options be traded on the company’s stock? Why or why not? 1 2 3 4 5

Carson Company currently has a mortgage on its office building through a savings institution. It is attempting to determine whether it should convert its 1 2 3 4 5 Back to Department Related Courses FIN 1103 – INTRODUCTION TO FINANCE (157 Documents)FIN 3501 – investments (81 Documents)

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