State one major advantage and one major disadvantage of each of the three valuation methodologies…

CFA Examination Level I

a. State one major advantage and one major disadvantage of each of the three valuation methodologies you used to value Philip Morris stock in Question 13.

b. State whether Philip Morris stock is undervalued or overvalued as of December 31, 1991. Support your conclusion using your answers to previous questions and any data provided. (The past 10- year average S&P Industrials Index relative price/earnings and price/book ratios for Philip Morris were 0.80 and 1.61, respectively.)

EASTOVER COMPANY (EO)

1996

1997

1998

1999

2000

2001

Earnings per share

$1.27

$2.12

$2.68

$1.56

$1.87

$0.90

Dividends per share

0.87

0.9

1.15

1.2

1.2

1.2

Book value per share

14.82

16.54

18.14

18.55

19.21

17.21

Stock price

High

28

40

30

33

28

30

Low

20

20

23

25

18

20

Close

25

26

25

28

22

27

Average P/E

18.9×

14.2×

9.9×

18.6×

12.3×

27.8×

Average price/book

1.6×

1.8×

1.5×

1.6×

1.2×

1.5×

SOUTHAMPTON COMPANY (SHC)

1996

1997

1998

1999

2000

2001

Earnings per share

$1.66

$3.13

$3.55

$5.08

$2.46

$1.75

Dividends per share

0.77

0.79

0.89

0.98

1.04

1.08

Book value per share

24.84

27.47

29.92

30.95

31.54

32.21

Stock price

High

34

40

38

43

45

46

Low

21

22

26

28

20

26

Close

31

27

28

39

27

44

Average P/E

16.6×

9.9×

9.0×

7.0×

13.2×

20.6×

Average price/book

1.1×

1.1×

1.1×

1.2×

1.0×

1.1×

S&P INDUSTRIALS

1996

1997

1998

1999

2000

2001

5-Year Average
(1997–2001)

Average P/E

15.8×

16.0×

11.1×

13.9×

15.6×

19.2×

15.2×

Average price/book

1.8×

2.1×

1.9×

2.2×

2.1×

2.3×

2.1×

CURRENT INFORMATION

Current
Share
Price

Current
Dividends
per Share

2002 EPS
Estimate

Current
Book Value
per Share

Eastover (EO)

$28

$1.20

$1.60

$17.32

Southampton (SHC)

48

1.08

3

32.21

S&P Industrials

1100

16

48

423.08