Sample Questions
Question 1
Easy
The PEG ratio is calculated as the P/E ratio divided by:
Solution
A is correct.
The PEG (Price/Earnings-to-Growth) ratio divides the P/E ratio by the expected earnings growth rate (in percentage terms, not decimal). For example, a stock with a P/E of and expected earnings growth of has a PEG of . . It adjusts the P/E ratio for growth, allowing comparison of companies with different growth prospects.
The PEG (Price/Earnings-to-Growth) ratio divides the P/E ratio by the expected earnings growth rate (in percentage terms, not decimal). For example, a stock with a P/E of and expected earnings growth of has a PEG of . . It adjusts the P/E ratio for growth, allowing comparison of companies with different growth prospects.
Question 2
Medium
The clean surplus relation requires that:
Solution
A is correct.
The clean surplus relation states:
where is book value, is earnings (net income), and is dividends. This means all changes in book value flow through the income statement — there are no 'dirty surplus' items that bypass income. The clean surplus relation requires that all changes in equity (other than transactions with owners like dividends) are captured in net income.
The clean surplus relation states:
where is book value, is earnings (net income), and is dividends. This means all changes in book value flow through the income statement — there are no 'dirty surplus' items that bypass income. The clean surplus relation requires that all changes in equity (other than transactions with owners like dividends) are captured in net income.
Question 3
Hard
Based on the vignette, what is Meridian's PVGO if the no-growth value is estimated using next year's earnings?
Solution
A is correct.
Step 1: .
Step 2: No-growth value .
Step 3: PVGO is measured against the market price, not the analyst's intrinsic value: .
The market is pricing about $13.82 per share of value attributable to growth opportunities beyond what the current earnings stream supports. PVGO is anchored to the observed price because it answers how much of the market's valuation is paying for growth; substituting the analyst's intrinsic value would make the comparison circular.
Step 1: .
Step 2: No-growth value .
Step 3: PVGO is measured against the market price, not the analyst's intrinsic value: .
The market is pricing about $13.82 per share of value attributable to growth opportunities beyond what the current earnings stream supports. PVGO is anchored to the observed price because it answers how much of the market's valuation is paying for growth; substituting the analyst's intrinsic value would make the comparison circular.
