Abbott Laboratories (ABT) engages in the discovery, development, manufacture, an

Question

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of a line of health care and pharmaceutical products. Below you will find selected information from Value Line. Use the Value Line estimated 2009 figures as the actual year-end figures for the company. The beta reported was 0.60 and the risk-free rate was 4.73 percent. Assume a market risk premium of 8 percent.

The high and low share price each year were:       

2)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of a line of health care and pharmaceutical products. Below you will find selected information from Value Line. Use the Value Line estimated 2009 figures as the actual year-end figures for the company. The beta reported was .80 and the risk-free rate was 5.53 percent. Assume a market risk premium of 7 percent.

The high and low share price each year were:       

What is the sustainable growth rate and required return for Abbott Laboratories? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

    

     

Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

        

2005 2006 2007 2008 2009 High 61.00 53.90 59.90 62.70 57.40 Low 49.50 41.90 46.80 45.80 44.50

Explanation / Answer

Part 1)

Part A)

The formula for calculating sustainable growth rate and required return is given below:

Sustainable Growth Rate = ROE*(1-Dividend Payout Ratio)

Required Return = Risk Free Rate + Beta*Market Risk Premium

____________

Here, ROE = 28% and Dividend Payout Ratio = 43%

Sustainable Growth Rate = 28%*(1-43%) = 15.96%

Required Return = 4.73 + .60*8 = 9.53%

____________

Part B)

To calculate the share price, we need to determine the growth rate of dividend. The growth rate of dividend can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Payment (if any), PV = Current Dividend, FV = Future Dividend

Share price can be calculated with the use of following forumla:

Current Share Price = Dividend*(1+Growth Rate)/(Required Return - Growth Rate)

____________

Here, Nper = 2 (using 2009 as the reference year), PMT = 0, PV = $1.60 and FV = $1.76

Using these values in the above function/formula for Rate, we get,

Growth Rate = Rate(2,0,-1.60,1.76) = 4.88%

Share Price = 1.76*(1+4.88%)/(9.53% - 4.88%) = $39.70

___________________________

Part 2)

Part A)

The formula for calculating sustainable growth rate and required return is given below:

Sustainable Growth Rate = ROE*(1-Dividend Payout Ratio)

Required Return = Risk Free Rate + Beta*Market Risk Premium

____________

Here, ROE = 28% and Dividend Payout Ratio = 43%

Sustainable Growth Rate = 28%*(1-43%) = 15.96%

Required Return = 5.53 + .80*7 = 11.13%

____________

Part B)

To calculate the share price, we need to determine the growth rate of dividend. The growth rate of dividend can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Payment (if any), PV = Current Dividend, FV = Future Dividend

Share price can be calculated with the use of following forumla:

Current Share Price = Dividend*(1+Growth Rate)/(Required Return - Growth Rate)

____________

Here, Nper = 2 (using 2009 as the reference year), PMT = 0, PV = $1.60 and FV = $1.76

Using these values in the above function/formula for Rate, we get,

Growth Rate = Rate(2,0,-1.60,1.76) = 4.88%

Share Price = 1.76*(1+4.88%)/(11.13% - 4.88%) = $29.53

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