PROBLEM C

Attention : Please answer all problems in PROBLEM C with the right and short explanation, explain by using the formula (if needed).

A. A firm can have a high trailing PIE ratio, yet have a low expected earnings growth rate in

the future. Is this so ?

B. For a firm with a normal trailing PIE ratio, expected future residual earnings must be the

same as current residual earnings. Correct ?

C. Does an increase in financial leverage increase or decrease the (levered) P/E ratio ?

D. Wall Street analyst predicted in 2009 (1 year after crisis 2008) that, after the considerable

deleveraging during the financial crisis, firms would begin once again to lever up with

more borrowing. "They must defend their return on equity," he claimed. As a result,

"investors should look for a rise in dividends and share buy-backs and an expansion of PIE

multiples, leading to equity market outperformance." Is he correct ?

E. The higher the anticipated return on net operating assets (RNOA) relative to the anticipated

growth in net operating assets, the higher will be the unlevered price to book ratio. Is this

correct ?