The market consensus is that Analog Electronic Corporation has an ROE = 13%, has
ID: 2720123 • Letter: T
Question
The market consensus is that Analog Electronic Corporation has an ROE = 13%, has a beta of 2.00, and plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $3.40 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.
I found this answer which is $15.94
b. Calculate the P/E ratio (I found the trailing P/E but have no clue how to find the leading)
Leading: _____
Trailing: 4.69
c. Calculate the present value of growth opportunities (Do not round intermediate calculations. Round your answer to 2 decimal places).
Explanation / Answer
expected return = risk-free rate + beta * (expected return on the market - risk-free rate)
= 5 + 2*(11-5) = 17%
growth rate = ROE*plowback ratio
= 13*3/5 = 7.8%
Future EPS = EPS*(1 + growth rate) = 3.4*(1 + 0.078) = 3.6652
DPS = EPS*(1- plowback ratio) = 3.6652*(1-3/5) = 1.46608
Price = DPS/(required rate - growth rate) = 1.46608/(.17-0.078) = 15.936
Leading PE = price/Leading EPS = 15.936/3.6652 = 4.348
c) Stock price = No growth value + PVGO
No growth value = DPS/required rate = 1.46608/.17 = 8.624
PVGO = 15.936 - 8.624 = 7.312
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