Chapter #18 HW Problems

3. The market consensus is that Analog Electronic Corporation has an ROE = 9%, has a beta of 1.30, and plans to maintain indefinitely its traditional plowback ratio of 1/3. This year's earnings were $2.90 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 11%, and T-bills currently offer a 5% return. b) Calculate the P/E ratio. Leading and Trailing

Leading: Price/E1 Trailing: Price/E0

3. The market consensus is that Analog Electronic Corporation has an ROE = 9%, has a beta of 1.30, and plans to maintain indefinitely its traditional plowback ratio of 1/3. This year's earnings were $2.90 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 11%, and T-bills currently offer a 5% return. c) Calculate the present value of growth opportunities.

PVGO = P0 - (E1/K)

6. The risk-free rate of return is 5.5%, the expected rate of return on the market portfolio is 13%, and the stock of Xyrong Corporation has a beta coefficient of 2.9. Xyrong pays out 45% of its earnings in dividends, and the latest earnings announced were $8.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 15% per year on all reinvested earnings forever. a. What is the intrinsic value of a share of Xyrong stock?

Step #1: Find g = ROE x b Step #2: Find k = rf + B(Erm - rf) Step #3: Find D1 = E0(1+g) Step #4: Find P0 = D1/(k-g)

2. A stock has an ROE of 18% and a plowback ratio of 65%. The market capitalization rate is 15%. b) What price do you expect the shares to sell for in x years?

Step 1: Financial Calculator PV = P0 N= x years I/Y = growth rate, g CPT FV

1. Expected ROR = k = x%. Will pay a year-end dividend of $x/share: b-1) If dividend growth forecasts for MBI are revised downward to 8% per year, what will happen to the price of MBI stock?

Step 1: Find P0 = D1/(k-g). 8% is your new g.

5. The stock of Nogro Corporation is currently selling for $30 per share. Earnings per share in the coming year are expected to be $4.00. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 16% rate of return per year. This situation is expected to continue indefinitely. b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?

Step 1: Find PVGO = P0 - (E1/K)

1. Expected ROR = k = x%. Will pay a year-end dividend of $x/share: b-2)What (qualitatively) will happen to the company's price-earnings ratio?

The price falls in response to the more pessimistic dividend forecast. The forecast for current year earnings, however, is unchanged. Therefore, the P/E ratio falls. The lower P/E ratio is evidence of the diminished optimism concerning the firm's growth prospects.

6. The risk-free rate of return is 5.5%, the expected rate of return on the market portfolio is 13%, and the stock of Xyrong Corporation has a beta coefficient of 2.9. Xyrong pays out 45% of its earnings in dividends, and the latest earnings announced were $8.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 15% per year on all reinvested earnings forever. b. If the market price of a share is currently $14.00, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Xyrong stock?

Step 1: Find P1 = P0(1+g) Step 2: Find Holding Period Return, HPR = (D1 + P1 - P0)/P0

5. The stock of Nogro Corporation is currently selling for $30 per share. Earnings per share in the coming year are expected to be $4.00. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 16% rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro's investors require?

Step 1: Find g = ROE x b Step 2: Find D1 = E1 x d Step 3: Find K = (D1/P0) + g

7. E1 = $18.5 ROE1-5 = 14% d = 0% b = 100% ROE6+ = 9% d6+ = 40% b6+ = 60% k = 25% a. What is your estimate of DEQS's intrinsic value per share?

Step 1: Find g1-5 = ROE x b Step 2: Find FV of E5 PV = E1 N = 5 I/y = g 1-5 CPT FV = E5 Step 3: Find g6+ = ROE 6+ x b 6+ Step 4: Find E6+ = E5(1+g6+) Step 5: Find D6+ = E6+ x d6+ Step 6: P5 = D6+/(k-g6+) Step 6: Find PV of P0 using P5 FV = P5 I/y = k N = 5 CPT PV = P0

3. The market consensus is that Analog Electronic Corporation has an ROE = 9%, has a beta of 1.30, and plans to maintain indefinitely its traditional plowback ratio of 1/3. This year's earnings were $2.90 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 11%, and T-bills currently offer a 5% return. a. Find the price at which Analog stock should sell.

Step 1: Find the Growth Rate, g = ROE x b Step 2: Solve for k = rf + B(Erm - rf) Step 3: Solve for E1 = E0(1+g) Step 4: Solve for D1 = E1 x d p/o Step 5: Solve for P0 = D1/(k-g)

1. Expected ROR = k = x%. Will pay a year-end dividend of $x/share: a) Stock sells @ $x.xx, what is the market expectation of the growth rate of the stock's dividends?

Step 1: Find the growth rate, g, by solving for k = (D1/P0) + g

2. A stock has an ROE of 18% and a plowback ratio of 65%. The market capitalization rate is 15%. a) The coming year's earnings are expected to be $x.xx/share, at which price will the stock sell?

Step 1: Find the growth rate: g=ROE x b Step 2: Find next year's, D1, dividend: D1 = EPS or E1 x d (dividend growth rate) Step 3: Find the price: P0 = D1/(k-g)

4. The company's dividends per share are expected to grow indefinitely by 7% per year. a. If this year's year-end dividend is $6.00 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM?

Step 1: P0 = D1/(k-g)

4. The company's dividends per share are expected to grow indefinitely by 7% per year. c. How much is the market paying per share for growth opportunities (i.e., for an ROE on future investments that exceeds the market capitalization rate)?

Step 1: V0 = E1/k Step 2: Amount = P0 - V0

4. The company's dividends per share are expected to grow indefinitely by 7% per year. b. If the expected earnings per share are $18.00, what is the implied value of the ROE on future investment opportunities?

Step 1: d = D1/E1 Step 2: g = ROE x b, solve for ROE