I was wondering if someone could show me the steps to take on this assignment. I

Question

I was wondering if someone could show me the steps to take on this assignment. I fell complelty clueless. I have no idea how to apply these steps. I did find the current treasury rate and the beta for Zoetis Inc. I hope this helps. Any help is appreciated!!

1.    obtain the most recent 10-year Treasury yield rate as the risk-free rate; (10-year Treasury yield down 2 basis points to 1.574%)

2.    Go to either Yahoo Finance or Google Finance to obtain the selected firm’s current beta ( or beta coefficient); (1.05)

3.    Assume the expected market return is 10%;

4.    Use the capital asset pricing model (CAPM) to calculate the required rate of return for equity financing purposes;

5.    Make a realistic assumption about the g growth rate (g) and apply either a) the dividend growth model or b) nonconstant dividend growth model equity valuation methods to calculate the intrinsic value of the firm. (Note: If using the nonconstant growth model you must show a minimum of 5 years of future cash flows or future dividends);

Zoetis Inc. (ZTS)

Explanation / Answer

4) The required rate of return of euqity under CAPM is given by

Ri = Rf + Bi (Rm - Rf)

where, Rf is the risk free rate, Rm the return of the market, Ri the return of the security and Bi the beta of the security.

Substituting the values given

Ri = 1.574 + 1.05(10.0 - 1.574) = 10.42%

So, the required rate of return on equity = 10.42%

5) a) Dividend growth model: Assume g = 5%

The intrinsic value of the stock is given by D1/(Ke - g), where D1 is the expected dividend for the next year, Ke is the required rate of return of equity and g is the growth rate.

The 2015 dividend paid by ZTS = 0.083*4 = $0.332 (as per financial statements for 2015)

So the intrinsic value of ZTS stock is (0.332*1.05)/(0.1042 - 0.05) = $6.43

Value of the firm's equity = 6.43*no of shares outstanding.

shares outstanding = 496.20 million as on date

6.43*496.20 millions = $3190.57 millions (value of the firm's equity)

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