25-30 Andrea Risso is a junior analyst with AquistareFianco, an independent equi

Question

25-30 Andrea Risso is a junior analyst with AquistareFianco, an independent equity research firm. Risso's supervisor asks her to update, as of 1 January 2015, a quarterly researclh report for Centralino S.p.A. a telecommunications company headquartered in Italy On that date, Centralino's common share price is 50 and its preferred shares trade for e5.25 per share. Risso gathers information on Centralino. Exhibit 1 presents earnings and divi- dend data, and Exhibit 2 presents balance sheet data. Net sales were 3.182 billion in 2014. Risso estimates a required return of 15% for Centralino and forecasts growth in dividends of 6% into perpetuity. Exhibit 1 Earnings and Dividends for Centralino, 2011-2015 2011 2012 2013 20142015(E) 493 554-46 4.46 6.00 2.91 14.96% 5.25 Earnings per share (EPS, e) Dividends per share (DPS, e) 2.45 2.60 2.60 Return on equity (ROE) Note: The data for 2011-2014 are actual and for 2015 are estimated. 5.64 2.75 14.21% 13.01% 13.71% 11.58% eet for Centralino, Year Ended 31 December 2014 Liabilities and Shareholders' Equity ( Current liabilities Long-term debt Total liabilities Preferred shares Common shares Retained earnings millions) 102 259 367 626 80 826 121 305 740 913 1,653

Explanation / Answer

25. P/E ratio shows the relationship between price and earnigs per share for a stock.

Formula for P/E ratio = Price / EPS

Given price on 1st Jan.2015 = 50

Earnings per share on 1st Jan. 2015 should be equal to the EPS on last day of 2014 i.e. on 31st Dec. 2014, which is 5.64.

Therefore P/E ratio = 50/5.64 = 8.87 or 8.9 rounded off to tens place (Therefore the answer is B)

26. Forward P/E ratio on the date 31st Dec. 2015 -

EPS = 6

Price as per Gordon Model =

Price (P0) = Dividend for next period(D1)/(Re - g)

Re = Required return

g = Growth rate of dividend

So, the answer is B.

D1 = 2.91 x 1.06 = 3.0846 Re = 0.15 g = 0.06 P0 = 3.0846/(0.15 -0.06) = 34.27 EPS = 6.00 Price = 34.27 P/E Ratio = 34.27/6 = 5.71

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