Assume it is the end of 2005 and T. Kohers Investment bankers uses a combined ea

Question

Assume it is the end of 2005 and T. Kohers Investment bankers uses a combined earnings and dividend model to determine the value of Meredith Corporation. The approach they take is to estimate earnings from their sales forecasts:

                               Sales(Mil.)                          Profit Margin

2006                             $8,163                                         .049

2007                               8,500                                         .050

2008                               9,490                                         .051

2009                             10,230                                         .052

2010                             11,040                                         .053

Thirty-five percent of earnings is paid out in dividends each year. Meredith Corporation has 100 shares outstanding. The risk-free rate of return is 5 percent and the market risk premium is 6 percent. Meredith’s beta is 1.5. It is anticipated that Meredith’s price earnings ratio to be 17 times earnings for 2010.

A) From the information above, calculate the expected net income for years 2006 through 2010.

B) From the information above, calculate the expected earnings per share for years 2006 through 2010.

C) From the information above, calculate the expected dividends for years 2006 through 2010.

D) Based on the price-earnings ratio, calculate the expected selling price in 2010.

E) Using the appropriate required rate of return, calculate the value that you think the price is worth today.

Explanation / Answer

A) Expeced Net income

B) Expected earnings per share

C) Expected dividends 35% of Net Income

D) Based on the price-earnings ratio, the expected selling price in 2010

Price Earning Ratio = Market Price per Share / Earning per Share

17 = MPS / 5.85

MPS = 5.85 * 17

MPS = 99.45

E) Require Rate of Return = Rf + Beta (Rm - Rf)

K = 5 + 1.5 (6)

K = 14

Price of Share using Require rate of Return

K = (D/S) + g

Where K = Require rate of Return = 14% = 0.14

D = Dividend per Share = 1.40

S = Price per Share = ?

g = Growth Rate = 10% = 0.10

0.14 = (1.40 / S) + 0.10

0.04 = 1.40 / S

S = 1.40 / 0.04

S = 35

Price per share as on today would be $35

Sales (Mill.) Profit Margin Net Income (Mill.) 2006 $8,163 0.049 $399.987 2007 $8,500 0.050 $425.00 2008 $9,490 0.051 $483.99 2009 $10,230 0.052 $531.96 2010 $11,040 0.053 $585.12

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