Solutions Manual
for
Equity Asset Valuation
Second Edition
Jerald E. Pinto, CFA
Elaine Henry, CFA
Thomas R. Robinson, CFA
John D. Stowe, CFA
with a contribution by
Raymond D. Rath, CFA
NOTE: This file includes solutions to the book’s end-of-chapter problems (Part II).
, CFA Institute is the premier association for investment professionals around the world,
with over 98,000 members in 133 countries. Since 1963 the organization has developed and
administered the renowned Chartered Financial Analyst® Program. With a rich history of
leading the investment profession, CFA Institute has set the highest standards in ethics, education,
and professional excellence within the global investment community, and is the foremost
authority on investment profession conduct and practice.
Each book in the CFA Institute Investment Series is geared toward industry practitioners
along with graduate-level finance students and covers the most important topics in the industry.
The authors of these cutting-edge books are themselves industry professionals and academics
and bring their wealth of knowledge and expertise to this series.
ffirs.indd ii 12/16/09 7:16:05 PM
, Copyright © 2010 by CFA Institute. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under
Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of
the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center,
Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at
www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department,
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online
at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing
this book, they make no representations or warranties with respect to the accuracy or completeness of the contents
of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.
No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies
contained herein may not be suitable for your situation. You should consult with a professional where appropriate.
Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including
but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer
Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or
fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be
available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.
ISBN 978-0-470-39521-9
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
ffirs.indd iv 12/16/09 7:16:05 PM
, CONTENTS
PART I
Learning Outcomes, Summary Overview, and Problems
CHAPTER 1
Equity Valuation: Applications and Processes 3
Learning Outcomes 3
Summary Overview 3
Problems 5
CHAPTER 2
Return Concepts 7
Learning Outcomes 7
Summary Overview 7
Problems 9
CHAPTER 3
Discounted Dividend Valuation 13
Learning Outcomes 13
Summary Overview 14
Problems 16
CHAPTER 4
Free Cash Flow Valuation 25
Learning Outcomes 25
Summary Overview 26
Problems 28
CHAPTER 5
Residual Income Valuation 41
Learning Outcomes 41
Summary Overview 42
Problems 43
v
ftoc.indd v 12/14/09 8:29:10 AM
for
Equity Asset Valuation
Second Edition
Jerald E. Pinto, CFA
Elaine Henry, CFA
Thomas R. Robinson, CFA
John D. Stowe, CFA
with a contribution by
Raymond D. Rath, CFA
NOTE: This file includes solutions to the book’s end-of-chapter problems (Part II).
, CFA Institute is the premier association for investment professionals around the world,
with over 98,000 members in 133 countries. Since 1963 the organization has developed and
administered the renowned Chartered Financial Analyst® Program. With a rich history of
leading the investment profession, CFA Institute has set the highest standards in ethics, education,
and professional excellence within the global investment community, and is the foremost
authority on investment profession conduct and practice.
Each book in the CFA Institute Investment Series is geared toward industry practitioners
along with graduate-level finance students and covers the most important topics in the industry.
The authors of these cutting-edge books are themselves industry professionals and academics
and bring their wealth of knowledge and expertise to this series.
ffirs.indd ii 12/16/09 7:16:05 PM
, Copyright © 2010 by CFA Institute. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under
Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of
the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center,
Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at
www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department,
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online
at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing
this book, they make no representations or warranties with respect to the accuracy or completeness of the contents
of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.
No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies
contained herein may not be suitable for your situation. You should consult with a professional where appropriate.
Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including
but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer
Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or
fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be
available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.
ISBN 978-0-470-39521-9
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
ffirs.indd iv 12/16/09 7:16:05 PM
, CONTENTS
PART I
Learning Outcomes, Summary Overview, and Problems
CHAPTER 1
Equity Valuation: Applications and Processes 3
Learning Outcomes 3
Summary Overview 3
Problems 5
CHAPTER 2
Return Concepts 7
Learning Outcomes 7
Summary Overview 7
Problems 9
CHAPTER 3
Discounted Dividend Valuation 13
Learning Outcomes 13
Summary Overview 14
Problems 16
CHAPTER 4
Free Cash Flow Valuation 25
Learning Outcomes 25
Summary Overview 26
Problems 28
CHAPTER 5
Residual Income Valuation 41
Learning Outcomes 41
Summary Overview 42
Problems 43
v
ftoc.indd v 12/14/09 8:29:10 AM
