A stock is expected to pay a dividend of $1.000 next year. Dividends are expecte

Question

A stock is expected to pay a dividend of $1.000 next year. Dividends are expected to grow at the rate of 3% per year after that. Earnings next year are expected at $1.50. The risk-free rate of return is 2% and the market risk premium is 5%. Assume this stock has a beta of 1.2. The P/S multiple is 1.7. The company has revenue of $150B, net income of $16B, and have a profit margin of 10.25%.

What is the return on equity?

What is the intrinsic value?

What are the present value of growth opportunities?

What is the approximate market cap?

What is the P/E?

Explanation / Answer

Return on equity = Risk free rate+ beta* market premium = 2% + 1.2 * 5% = 8%

Intrinsic value = Dividend / ( Equity rate - growth rate) = 1 / ( 0.08 - 003) = $20

PVGO = Stock Price - Earning / Cost of equity = 20 - 1.5/0.08 = $1.25

Market Capitalization = P/S * Total Sales = 1.7 * 150 = $255 B

P/E ratio = 255 B / 16 B = 15.94 Times

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