Question

Question 2

John Smith, a security analyst, has been assigned to analyze China Mobile using the constant-dividend-growth model. Johnassumes that China Mobile’s earnings and dividends will grow at a constant rate.

Identify, within the context of the constant-dividend-growth model, how each of the following factors would affect the P/E ratio.

       a) Systematic Risk of China Mobile.                                                                           

b) Estimated growth rate of earnings and dividends.                                                         

     c) Interest rate                                                                                                               

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Question 3

a) What is systematic risk and unsystematic risk?                                  

b) How to obtain Beta and Residual risk in CAMP ? explain with an example   

Please don't use other people's answers, answer more details, thank you

Answer 1

Solution:

2.Price to earning ratio of market price per share to annual earning per share(EPS) of a company.

a)Systematic risk affect the P/E ratio in following manner:

Systematic risk is known to affect the market prices of traded financial assets(such as share of the company) of the market.It is also known as market risk.In case of uncertainity of the market(higher market risk) stock market price will fall.

b)Estimated growth rate of earnings and dividends affect the P/E ratio in following manner:

P/E ratio also depends on the future earnings of the comapany.Certain companies have high P/E ratio because the investor has higher growth expectation.Higher growth expectation result in incease in share price of company.

(c)Intesrest rate affect the P/E ratio in following manner:

Rising interest rate usually leads to higher operating cost,decreasing sales and falling earnings.This result in decreasing Earning per share and consequently shrink the P/E ratio.If the interest rate decreases the result will be opposite.