Price / Earnings Ratio and Housing Price

What three alternative measures of the price-earnings ratio (P/E ratio) are described in this article? Answer: Following are three price-earnings ratio described in the article: 1. P/E ratio 2. “Forward” P/E ratio 3. “Trailing” P/E ration Q2: (Advanced) Which of the three measures matches the definition of the P/E ratio given in your textbook? Explain your answer. Answer: Books has only discuss the simple P/E ratio, PE ratio measures how much investor willing to pay per dollar of current earnings, higher PEs are often taken to mean that firm has significant prospects for future growth.Price per Share PE Ratio = _____________________ Earnings per Share Generally similar firms have similar PE ratios, like technology companies may have similar PE ratio compare to utility, because technology more opportunity to fast growth with some risk where utility companies may be slow growth with very low risk. Q3: (Introductory) What weakness in the simple P/E ratio is overcome by using the “forward” P/E ratio? What problems arise with the forward measurement? Answer: “Forward” P/E measure is the price-to-earnings ratio (P/E) using forecasted earnings for next 12 month or giving period of time.Simple P/E give only current ratio for current earning where forward P/E give near future earnings. Where high forward P/E mean that company investors are willing to more because they expect earnings to grow. The problem with “forward” P/E is it is based on analysis earning forecast, as Mr. Mortimer said “You can make the forward P/E anything you want [by boosting the forecast],”. Q4: (Advanced) What weakness in the simple P/E ratio is overcome by using the trailing four quarters in the measurement?Specifically identify how this measure differs from the simple P/E ratio first described in the article. Answer: “Trailing” P/E is calculated based on last four quarter actual earnings (after adjustment of unusual gain or charges etc. interest, law suit). Trailing P/E give more realistic company picture. Where simple P/E ratio calculates the based on current share price and last 12 months earning (with adjustment). Q5: (Advanced) The author states that users should make adjustments for unusual items in the “trailing” P/E measure.Why do you think that is his recommendation? Answer: To get realistic earning, because company may have bad quarter where earning may drop due to law suit or any incident, and it could to boost due to unusual profit due to high demand of specific company product. Example: Sandy hurricane which made generator demand so high which could not happen next 100 years. Q6: (Advanced) “Low P/E stocks outperform high P/E stocks”, say jess Mortimer…” Explain the arguments for this assertion by the investment strategy director at BNY Mellon wealth Management.Answer:As per Mortimer low P/E stocks are outperform and give surprise results, where Mr. Mellon argument is, it does but as group with over the period of time not in the short term. Housing Price Are on Tear, Thanks to the Fed Q1: How much did housing prices rise in February from a year ago? Answer: 10% Q2: Why have inventories of homes available for sale fallen to 20-year lows? How has this contributed to rising housing prices? Answer: Due to 2008 economic recession home sales went historical down, new constructions nventory pile up due to slow sales, builders stop new plan and trying to sales their existing plan which created the gap for future market needs, since last quester house market has slowly bouncing back but this slow recovery not giving builders enough confident to build more inventory. Q3: The article implies that tight lending standards have contributed to rising housing prices? What is rationale behind this claim? What argument could you make that tight lending standards are helping to keep housing prices from rising?Answer: Before 2008 economic recession many family invested the money in housing market and bought two houses or some people moved to home with 0% down payment, interest only loan and even Bank issues the loan without proper verification of Job stability. People are scare that if they sale current house they may not going to get loan due to more verification and financial health of the loaner. This issue letting people to stay in same home instance of upgrade them self and impacting market inventory to low since build already not building more houses and driving home price higher.Q4: What factors are pushing up the demand for housing? How do these factors contribute to rising housing prices? Answer: Following are few points/factors pushing housing market and demand. •Increase in population, more first time buy want to own their first house •Current low interest rate attracting people •House price is low compare to previous years •First time home buyers thinking interest rate and house price may go up soon •Higher rent since many investor bought the foreclosure and renting itQ5: The article states that monthly payments of $1000 each for 30 years whould allow a $165,000 mortgage if interest rates were 6. 1% (as was the case in late 2008) and a $222,000 mortgage at current interests rates of 3. 5%. Show this mathematically. How do these lower interest rates contribute to rising housing prices? Answer: Q6: Do you think housing prices are rising too quickly? Why or Why. Answer: Yes it is because of demand, low inventory and low interest rates.


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