CAS Exam 7 Spring 2018, Question 18
Study guide: Exam 7
Given the following financial information for a P&C insurance company as of December 31, 2017:
- Firm's projected ROE = 12.0%.
- Projected dividend payout rate = 50.0%.
- Yield on long-term T-bonds = 3.0%.
- Liquidity premium for long-term T-bonds = 1.0%.
- Expected equity risk premium = 6.0%.
- Insurer's equity beta for the Company = 1.5.
- Insurer's book value as of December 31, 2017 = $100M.
Part a (1 point)
Calculate the company's Price to Book Value (P-BV) multiple, assuming projections continue into perpetuity.
Part b (0.5 points)
Calculate the company's Price to Book Value (P-BV) multiple, assuming excess returns, if any, decline to the cost of capital after 3 years.
Part c (0.5 points)
Identify and briefly discuss which Price to Book Value multiple would serve as a more reasonable indicator in the valuation of the company considering parts a. and b. above.
Part d (0.5 points)
Describe one reason why transaction multiples based on initial public offerings or mergers and acquisitions of peer firms may be a better reflection in the valuation of the company than the approaches used in parts a. and b. above.
Part e (1 point)
Describe two reasons why transaction multiples based on initial public offerings or mergers and acquisitions of peer firms may not be better reflections in the valuation of a company than in the approaches used in parts a. and b. above.
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