H4 - (a) At what price should the stock of PQR sell if it...

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H ASS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 S UMMER 2008 A VINASH V ERMA H OMEWORK 4 1.According to Table 4.7 on page 75 of the 8 th edition of the text: Ticker P 0 (Price Apr '04) EPS 1 r PVGO = P 0 - EPS 1 /r PVGO/P 0 C 48.09 3.82 .117 15.47 32% DOW 39.69 2.25 .082 12.16 31% GM 47.42 6.49 .102 -16.27 -34% JCP 33.86 1.4 .071 14.25 42% AMZN 43.60 1.14 .173 37.00 85% CSCO 20.91 0.76 .174 16.54 79% MSFT 26.13 1.22 .133 16.98 65% SBUX 38.92 0.95 .058 22.44 58 Update this table by (1) using the price on the close of business on 6/5/08 (or any other date this week so long as you specify the date), (2) looking up EPS 1 or computing it by taking trailing twelve months EPS and multiplying it by one plus the last year’s earnings growth, and (3) re-computing columns (5) and (6) assuming that r , the market capitalization rate that the text mentions in column (4) has remained unchanged. 2. Suppose PQR Corp. just paid a dividend of $0.60. The firm has a payout ratio of 20%, and its dividends are expected to grow in perpetuity at 16%. You estimate that its market capitalization rate is 17%.
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Unformatted text preview: (a) At what price should the stock of PQR sell if it is priced by the constant dividend growth model? (b) Decompose the price into PVGO and the present value of Assets-in-Place (c) What is the return on book value of equity for this firm, assuming that the growth rate can be estimated by the product of the retention ratio and the return on book value of equity? (d) Compute B , the current book value of equity for the firm on a per share basis. 3. XYZ Inc. just paid out a dividend ( D ) of $2.25. The firm anticipates that its annual dividends will grow at 20% a year over the next 6 years (from October 2007 to October 2013). From October 2013 onwards, the management expects that the firms dividends will grow in perpetuity at 4% per year. Work out the price of the stock assuming that the risk of its future cash flows justify a discount rate of 16%. 1...
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