Question

The market consensus is that Analog Electronic Corporation has an ROE = 6% and a beta of 1.30. It plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $3.0 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 15%, and T-bills currently offer a 5% return.

a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price            $   

b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	P/E ratio
Leading
Trailing

c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

PVGO            $

d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 2/5. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Intrinsic value of the stock            $

Answer 1

Answer a.

Required Return, r = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return, r = 5% + 1.30 * (15% - 5%)
Required Return, r = 18%

Growth Rate, g = ROE * Plowback Ratio
Growth Rate, g = 6% * 3/5
Growth Rate, g = 3.6%

D0 = EPS0 * (1 - Plowback Ratio)
D0 = $3.00 * (1 - 3/5)
D0 = $1.20

D1 = D0 * (1 + g)
D1 = $1.20 * 1.036
D1 = $1.2432

Current Price, P0 = D1 / (r - g)
Current Price, P0 = $1.2432 / (0.18 - 0.036)
Current Price, P0 = $8.63

Answer b.

EPS1 = EPS0 * (1 + g)
EPS1 = $3.00 * 1.036
EPS1 = $3.108

Leading P/E Ratio = P0 / EPS1
Leading P/E Ratio = $8.63 / $3.108
Leading P/E Ratio = 2.78

Trailing P/E Ratio = P0 / EPS0
Trailing P/E Ratio = $8.63 / $3.00
Trailing P/E Ratio = 2.88

Answer c.

PVGO = P0 - EPS1 / r
PVGO = $8.63 - $3.108 / 0.18
PVGO = -$8.64

Answer d.

Required Return, r = 18%

Growth Rate, g = ROE * Plowback Ratio
Growth Rate, g = 6% * 2/5
Growth Rate, g = 2.4%

D0 = EPS0 * (1 - Plowback Ratio)
D0 = $3.00 * (1 - 2/5)
D0 = $1.80

D1 = D0 * (1 + g)
D1 = $1.80 * 1.024
D1 = $1.8432

Current Price, P0 = D1 / (r - g)
Current Price, P0 = $1.8432 / (0.18 - 0.024)
Current Price, P0 = $11.82