It is your first day at a major hedge fund. Your director comes up to you...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
It is your first day at a major hedge fund. Your director comes up to you and goes "Hey, Zoom's trading at a P/E (price-earnings) ratio that's much than higher Goldman Sach's. Clearly Zoom is overvalued!" Let's figure out if this is necessarily true. Suppose a common and constant discount rate of 10%. At the end of the year, Zoom will have $.05 earnings a share while Goldman Sachs will have a dollar earnings a share. Goldman Sachs Valuation. Suppose that Goldman's expected earning growth is 3.33% annually. What's the present discounted value of Goldman's earnings? What is the price-earnings (P/E) ratio? (Compute as present discounted value over earnings today.) a. b. Zoom Valuation. Suppose that Zoom's expected earning growth is 9% annually. What's the present discounted value of Zoom? What is Zoom's P/E Ratio? c. Analysis. Given the assumptions in Part 1 and 2, is your director right? Why or why not? d. Optional. Why else might the price to earnings ratio be different? It is your first day at a major hedge fund. Your director comes up to you and goes "Hey, Zoom's trading at a P/E (price-earnings) ratio that's much than higher Goldman Sach's. Clearly Zoom is overvalued!" Let's figure out if this is necessarily true. Suppose a common and constant discount rate of 10%. At the end of the year, Zoom will have $.05 earnings a share while Goldman Sachs will have a dollar earnings a share. Goldman Sachs Valuation. Suppose that Goldman's expected earning growth is 3.33% annually. What's the present discounted value of Goldman's earnings? What is the price-earnings (P/E) ratio? (Compute as present discounted value over earnings today.) a. b. Zoom Valuation. Suppose that Zoom's expected earning growth is 9% annually. What's the present discounted value of Zoom? What is Zoom's P/E Ratio? c. Analysis. Given the assumptions in Part 1 and 2, is your director right? Why or why not? d. Optional. Why else might the price to earnings ratio be different?
Expert Answer:
Answer rating: 100% (QA)
a To calculate the present discounted value of Goldman Sachs earnings we can use the formula Present Value Earnings ... View the full answer
Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
Posted Date:
Students also viewed these finance questions
-
Lord Farquaad is considering two business ideas and require you to advise him which of the businesses are feasible and he should pursue. He is considering a fast-food outlet in the central business...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
9:49 X Bank Reconciliation Assignment 1 PDF 150 KB Assignment #1 - Bank Reconciliation This assignment has 33 total marks. This assignment is worth 5% of your final grade. This assignment is due...
-
A sub-rounded to sub-angular sand has a D10 of about 0.1 mm and a uniformity coefficient of 3. The angle of shearing resistance measured in the direct shear test was 47. Is this reasonable? Why or...
-
A charge q is released from rest at the origin, in the presence of a uniform electric field E = E0z and a uniform magnetic field B = B0x. Determine the trajectory of the particle by transforming to a...
-
A conducting sphere has a radius of \(2.25 \mathrm{~m}\) and carries a positive surplus charge of \(35.0 \mathrm{mC}\). A protective layer of barium titanate is applied to the surface of the sphere...
-
Quilcene Oysteria farms and sells oysters in the Pacific Northwest. The company harvested and sold 8,000 pounds of oysters in August. The companys flexible budget for August appears below: The actual...
-
14.An equi-concave lens of radius of curvature 15 cm and = 1.5 is placed in water (=1.33). If one surface is silvered, then image distance from lens when an object is placed at distance of 14 cm from...
-
A company is evaluating a potential investment opportunity. The investment has an expected return of 12% and a standard deviation of 8%. The company's risk-free rate is 5%, and its market risk...
-
Explain a team situation in which you experienced conflict. What was the purpose of the team? Why did the affective and/or cognitive conflict occur? How did the team resolve the conflict? What was...
-
What are two communication tools (other than email and telephone) that facilitate paperless communication of routine messages?
-
Imagine you have a teammate who wants to do all the project work himself because he does not trust anyone else on the team to produce high-quality results. How would you respond to that teammate?
-
What elements do you need to analyze to plan your message?
-
Explain the difference between the primary audience and the secondary audience.
-
Examine how a particular OB theory/ concept is implemented by one of the top 100 companies in Canada and describe your findings in a written report.
-
Difference between truncate & delete
-
What is the difference between the planning and the control functions of the budget? What problems do these differences create?
-
Our cash budget shows a surplus for the quarter, so we do not have to think about arranging any bank financing. Comment on this statement.
-
The production volume variance should be charged to the production manager. Do you agree? Why or why not?
-
The line depicting the risk and return of portfolio combinations of a risk-free asset and any risky asset is the: A. Security market line. B. Capital allocation line. C. Security characteristic line.
-
Relative to portfolios on the CML, any portfolio that plots above the CML is considered: A. Inferior. B. Inefficient. C. Unachievable.
-
The capital market line, CML, is the graph of the risk and return of portfolio combinations consisting of the risk-free asset and: A. Any risky portfolio. B. The market portfolio. C. The leveraged...
Study smarter with the SolutionInn App