课后题.docx

课后题.docx

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课后题

Chapter12

QUESTIONS

1.Whywouldyouexpectarelationshipbetweeneconomicactivityandstockpricemovements?

Thereasonforthestrongrelationshipbetweentheaggregateeconomyandthestockmarketisobviousifoneconsidersthatstockpricesreflectchangesinexpectationsforfirmsandtheresultsforindividualfirmsareaffectedbytheoverallperformanceoftheeconomy.Inessence,youwouldexpectearningsoffirmstoincreaseinanexpansion.Then,iftheP/Eratioremainsconstantorincreasesbecauseofhigherexpectationsandthereisnoreasonwhyitshouldnot,youwouldexpectanincreaseinstockprices.

2.Atalunchwithsomebusinessassociates,youdiscussthereasonfortherelationshipbetweentheeconomyandthestockmarket.Oneofyourassociatescontendsthatshehasheardthatstockpricestypicallyturnbeforetheeconomydoes.Howwouldyouexplainthisphenomenon?

Stockpricesturnbeforetheeconomyfortworeasons:

First,investorsattempttoestimatefutureearningsandthuscurrentstockpricesarebaseduponfutureearningsanddividends,whichinturnaredeterminedbyexpectationsoffutureeconomicactivity.Thesecondpossiblereasonisthatthestockmarketreactstovariouseconomicseriesthatareleadingindicatorsoftheeconomy-e.g.,corporateearnings,profitmargins,andmoneysupply.

3.Explainthefollowingstatements：

（a）Thereisastrong,consistentrelationshipbetweenmoneysupplychangesandstockprices.（b）Moneysupplychangescannotbeusedtopredictstockpricemovements.

VirtuallyallresearchhasshowntheexistenceofastrongrelationshipbetweenmoneysupplyandstockpricesasisevidentfromhighR2swhenmoneysupplyisusedtoexplainstockpricechanges.However,itisnotpossibletousemoneysupplychangestopredictchangesinstockprices,andthisisnotcontradictory,sincethestockmarketapparentlyreactsimmediatelytochangesinmoneysupplyorinvestors’attemptstopredictthisimportantvariable.Asaresult,itisimpossibletoderiveexcessprofitsfromwatchingcurrentorrecentpastchangesinthegrowthrateofthemoneysupply.

4.Youareinformedofthefollowingestimates：

Nominalmoneysupplyisexpectedtogrowatarateof7percent,andGDPisestimatedtogrowat4percent.Explainwhatyouthinkwillhappentostockpricesduringthisperiodandthereasonforyourexpectation.

Excessliquidityistheyear-to-yearpercentagechangeintheM2moneysupplylesstheyear-to-yearpercentagechangeinnominalGDP.Theeconomy’sneedforliquidityisgivenbyitsnominalgrowth.AnygrowthinM2greaterthanthatindicatesexcessliquiditythatisavailableforbuyingsecurities,whichwoulddriveupprices.

Ontheotherhand,monetarygrowthinexcessofGDPgrowthmayleadtoexpectedinflation.TheriseinexpectedinflationwouldcausethenominalRFRtorise,inturncausingtherequiredreturntorise.Thiseffectwouldleadtoadeclineinstockprices.

5.Thecurrentrateofinflationis3percent,andlong-termTreasurybondsareyielding7percent.Youestimatethattherateofinflationwillincreaseto6percent.Whatdoyouexpecttohappentolong-termbondyields?

Computetheeffectofthischangeininflationonthepriceofa15-year,10percentcouponbondwithacurrentyieldtomaturityof8percent.

Ifthemarketfullyanticipatestheriseininflation,thelongbondrateshouldriseto10%.Ifweassumeannualcoupons,the15-year8%bondwillgofromapriceof$1,091.03to$847.89.

6.Someobserverscontendthatitishardertoestimatetheeffectofachangeininterestratesoncommonstocksthanonbonds.Discussthiscontention.

Mostoftheinputsindeterminingthepriceofabondareknown–forinstance,thepromisedcouponpayments,theprincipalamount,andthedatesonwhichthosepaymentswillbereceived.Theonevariabletobeestimatedistherequiredreturn,whichcanbefoundeasilybycomparingthebondinquestiontoasimilarexistingbond.

Incontrast,thepaymentsoncommonstockarenotknown,northedatesonwhichtheymightbereceived.Further,therequiredreturnismoredifficulttoestimate.

7.Aninvestorisconvincedthatthestockmarketwillexperienceasubstantialincreasenextyearbecausecorporateearningsareexpectedtorisebyatleast12percent.Doyouagreeordisagree?

Whyorwhynot?

Althoughcorporateearningsmayriseby12percentnextyear,thatinformationbyitselfisnotsufficienttoforecastanincreaseinthestockmarket.Themarketlevelisaproductofbothcorporateearningsandtheearningsmultiple.Theearningsmultiplemustlikewisebeprojectedsinceitisnotstableovertime.

8.FindatleastthreesourcesofhistoricalinformationonnominalandrealGDP.FindtwosourcesofanannualestimateofnominalGDP.

9.Toarriveatanestimateofthenetprofitmargin,whywouldyouspendtimeestimatingtheoperatingprofitmarginandworkdown?

Theinvestorcanimprovehisnetprofitmarginestimatebyworkingfromthegrossmargindowntothenetprofitmargin.Bythisprocedure,theinvestorexplicitlyconsiderseachmajorcomponentthataffectsthenetprofitmargin.Thislevelofanalysisprovidesinsightsintothecomponentswhichdonotbehaveconsistentlyovertime.Also,thegrossprofitmarginshouldbeeasiertoestimatesinceithasthelowestlevelofrelativevariability.

10.Youareconvincedthatcapacityutilizationnextyearwilldeclinefrom82percenttoabout79percent.Explainwhateffectthischangewillhaveontheoperatingprofitmargin.

Theeffectofadeclineincapacityutilizationshouldbeadeclineintheaggregateprofitmargin,allelsethesame,becauseitwillmeangreateroverheadanddepreciationperunitofoutput.Alsomorefixedfinancialchargesperunit.

11.Youseeanestimatethathourlywagerateswillincreaseby6percentnextyear.Howdoesthisaffectyourestimateoftheoperatingprofitmargin?

Whatotherinformationdoyouneedtodeterminetheeffectofthiswagerateincreaseandwhydoyouneedit?

Theincreaseinhourlywagesof6percentwill,allelseheldequal,causetheoperatingmargintodecrease.Inadditiontotheestimateofthechangesinthehourlywagerate,anestimateoftheproductivityratechangeisalsoneededtoforecasttheunitlaborcostchange.Therelationshipis:

%∆HourlyWages%∆Productivity=%∆UnitLaborCost

12.Itisestimatedthat,nextyear,hourlywagerateswillincreaseby7percentandproductivitywillincreaseby5percent.Whatwouldyouexpecttohappentounitlaborcost?

Discusshowthisunitlaborcostestimatewouldinfluenceyourestimateoftheoperatingprofitmargin.

7.05.0=2.0%increaseintheunitlaborcost.Theunitlaborcostisnegativelyrelatedtotheprofitmargin.Thisincreasewould,holdingotherfactorsconstant,decreasetheaggregateprofitmargin.Becauseitisalowrateofincrease,theeffectontheprofitmarginshouldbesmall.

13.Assumethateachofthefollowingchangesidindependent（i.e.,exceptforthischange,allotherfactorsremainunchanged）.Ineachcase,indicatewhatwillhappentotheearningsmultiplierandexplainwhy

a.Thereturnonequityincreases

b.Theaggregatedebt-equityratiodeclines

c.Overallproductivityofcapitalincreases

d.Thedividend-payoutratiodeclines

13（a）.AnincreaseintheROEwithnootherchangesshouldcauseanincreaseinthemultiplebecauseitwouldimplyahighergrowthrate.Animportantquestionis,howwastheincreaseinROEaccomplished?

Ifitwasduetooperatingfactors（higherassetturnoverorprofitmargin）itispositive.Ifitwasduetoanincreaseinfinancialleverage,therecouldbesomeoffsetduetoanincreaseintherequiredrateofreturn（k）.

13（b）.Increase,becausethiswillincreaseearningsgrowthbyraisingequityturnover.Itcouldalsocauseadecreasebecauseitwillincreasethefinancialriskand,thus,therequiredk.

13（c）.Decrease,becausethiswillincreasegrowthandthereforeraisetherealRFR.Itcouldalsoreduceinflation,whichwoulddecreasethenominalRFR,causingthemultipliertorise.

13（d）.Increase,becauseadecreaseinthedividendpayoutrateincreasestheretentionrate,raisingthegrowthrate.Itcouldalsocauseadecreasebecauseitreducesthenextperiod'sdividends.

PROBLEMS

4.YouaretoldthatnominalGDPwillincreasebyabout10percentnextyear.UsingExhibit12.15andtheregressionequation,whatincreasewouldyouexpectincorporatesales?

Howwouldthisestimatechangeifyougavemoreweighttotherecentobservations?

Usingonlythegraphanddrawingalineoverfromtenpercenttothelineofbestfitanddowntothehorizontalpercentchangeindicatesanestimateofslightlyunder10%fortheS&Pseries.Alternatively,ifyouapplythefollowingregressionequation:

%∆S&PIndustrialsSales=-2.66+1.76（%∆inNominalGDP）=-2.66+1.76（10%）=-2.66+17.6=14.94%

Exhibit12.15wasbaseduponananalysisthatencompassedtheperiod:

1993-2003.TheoverallaveragenominalGDPpercentagechangewas5.1%,with3.0%changeinS&PIndustrialssalespershare.Duringtheperiod2001-2003,thepercentagechangeinGDPwaslowerthantheaverageovertheperiod（approximately3.9%）andlowerthanthe10%proposedintheproblem.Therefore,onecouldarguethat,basedonrecentobservations,thepercentagechangeinS&PIndustrialssalespershareshouldalsobelower:

%S&PIndustrialsSales=-2.66+1.76（3.9%）=-2.66+6.86=4.20%

OneshouldalsonotethatnominalGDPgrowthduring2004-2005wasclosertotheperformanceofthe1990sthantotheearly2000s（4.8-4.9%）.OnemustmakeajudgmentcallastowhattheGDPforecastis.

5.Currently,thedividend-payoutratio（D/E）fortheaggregatemarketis6