Using the chart below, compute the VRE ratio for each company and use it to dete

Question

Using the chart below, compute the VRE ratio for each company and use it to determine which firm(s) might interest a value investor:

                                      ROE                Price                EPS

Company A                 15%                 $60                  $3.00

Company B                 20%                 $30                  $2.00

Company C                 12%                 $15                  $1.50

1-    Using the above information, calculate the VRE for Company A.

2-    Using the above information, calculate the VRE for Company B.

3-    Based on the VRE calculations, which firm(s) would be attractive to a value investor? Select one or more:

·        Company A

·        Company B

·        Company C

·        Both Company B and Company C.

Explanation / Answer

                                    ROE                Price                EPS Company A                 15 60 3 Company B                 20 30 2 Company C                 12 15 1.5 VRE is nothing but ROE divided by the Price/Earning ratio So first we need to calculate the price to earning ratio P/E 1 Company A                 20 Simply calculated by dividing price/EPS 2 Company B                 15 Simply calculated by dividing price/EPS 3 Company C                 10 Simply calculated by dividing price/EPS Calculating VRE by dividing ROE by P/E VRE 1 Company A                 0.75 2 Company B                 1.33 Company C                 1.20 3 Since VRE for both firm B and C are more than 1 both B and C will be attractive for a value investor

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