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Lockheed Martin Inc. a U.S. defense contractor producing ballistic missile defense systems, distributed dividends of $10...

Lockheed Martin Inc. a U.S. defense contractor producing ballistic missile defense systems, distributed dividends of $10 per share in 2019 on earnings per share of $15 per share. The book value of equity per share was $200, and earnings are expected to grow at a constant rate of 1% a year forever. The stock has an unlevered beta of 1.00, a debt to equity (D/E) ratio of 40%, and is currently trading at $150 per share. The current risk free rate is 1% and the implied equity risk premium is 5%. The corporate tax rate is 30%.

  1. Estimate the levered beta of Lockheed Martin Inc.. (2 mark)
  1. Estimate the cost of equity of Lockheed Martin Inc..  (2 mark)
  1. Estimate the fair Price/Book Value ratio for Lockheed Martin Inc. based on the inputs provided above.  
  1. What dividend per share (in dollars) should Lockheed Martin Inc. distribute to shareholders to justify the Price/Book Value ratio at which the firm is currently selling for?  

Solutions

Expert Solution

a Levered beta of Lockheed Martin Inc.
Levered beta=Unlevered beta*(1+((1-Tax rate)*Debt/equity)))
ie.1*(1+((1-30%)*40%)))
1.28
(Answer)
b.Cost of equity of Lockheed Martin Inc.
as per CAPM, ke=RFR+(Beta*Market risk premium)
ie.1%+(1.28*5%)=
7.40%
(Answer)
c.Estimate of fair price based on the above
we need to know the growth rate of dividends, to calculate the fair price ,ie. Intrinsic value per equity share---
Growth rate, g =Return on equity*Retention Ratio
From the given details, we can calculate g, as
g=(EPS/Book value Share)*((EPS-Dividends)/EPS)
ie.(15/200)*((15-10)/15)
7.50%*33.33%
2.50%
Now, the fair price of the share
as per Gordon's constant growth of dividend cash flows, model
P0=D1/(r-g)
ie. (10*1.025)/(7.40%-2.50%)=
209.18
So the
Fair Price/Book Value ratio=
209.18/200=
1.0459
(Answer)
d.Dividend per share($) Lockheed Martin Inc. should distribute to shareholders to justify the Price/Book Value ratio at which the firm is currently selling for, ie. $ 150
next dividend per share to be distributed   is
7.40%=(d1/150)+2.50%
D1= $ 7.35 (Answer)

jeff jeffy answered 2 years ago
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