Abbott (ABT) engages in the R&D of health care and pharmaceutical products. You

Question

Abbott (ABT) engages in the R&D of health care and pharmaceutical products. You need to access Value Line website through the University Library to download the most updated Value Line Report and answer the following questions. Use the Value Line estimated 2011 figures as the actual year-end figures for the company. You can find beta reported on Value Line. Risk-free rate was 3.10%. Assume a market risk premium of 8%. You can find the high and low share price each year from 2005 to 2010.

(1) Find the required rate of return for ABT.
(2)Find the sustainable growth rate.

Explanation / Answer

Here the Risk free rate = 3.10% Market rsik premium = 8% Beta = 0.31 (Taken from the recent ABT finacial Info ) 1.Required rate of return = Rf+ Beta [ E(Rm-Rf)] = 3.10% + 0.31*8% = 3.10%+2.48% = 5.58% 2)Expected return = Devidend yield + Growth rate DPS = 1.72 (Taken from Wed site) Share price = 50.11 (Taken open value on 8/18/11 MM/DD/YY) Dividend yield = D/ P = 1.72 / 50.11 = 3.43% Substiitute these Dividend yield and Expected return into the above formula 5.58% = 3.43% +Growth Growth = 5.58% -3.43% = 2.15% Note : Reagarding Dividend paid ,and Beta figures have been taken from the 2011 year (as on the 18th AUG)

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