(1) Abbott (ABT) engages in the R&D of health care and pharmaceutical products.

Question

(1) Abbott (ABT) engages in the R&D of health care and pharmaceutical products. You need to access Value Line website through the University Library to download the most updated Value Line Report and answer the following questions. Use the Value Line estimated 2011 figures as the actual year-end figures for the company. You can find beta reported on Value Line. Risk-free rate was 3.10%. Assume a market risk premium of 8%. You can find the high and low share price each year from 2005 to 2010.
(2)&(3)

Here the Risk free rate = 3.10%
Market rsik premium = 8%
Beta = 0.31 (Taken from the recent ABT finacial Info )
1.Required rate of return = Rf+ Beta [ E(Rm-Rf)]
= 3.10% + 0.31*8%
= 3.10%+2.48%
= 5.58%
2)Expected return = Devidend yield + Growth rate
DPS = 1.72 (Taken from Wed site)
Share price = 50.11 (Taken open value on 8/18/11 MM/DD/YY)
Dividend yield = D/ P
= 1.72 / 50.11
= 3.43%
Substiitute these Dividend yield and Expected return into the above formula
5.58% = 3.43% +Growth
Growth = 5.58% -3.43%
= 2.15%
Note : Reagarding Dividend paid ,and Beta figures have been taken from the 2011 year (as on the 18th AUG)

(4) Using information you estimated for (2) and (3) to calculate the 2011 share price of ABT stock according to the constant dividend growth model. (5 points)
(5) Using the P/E, P/CF, and P/S ratios estimate the 2011 share price for ABT. Use the average stock price each year to calculate the price ratios. (5 points)
(6) Given your answers in the previous questions, do you feel ABT is overvalued or undervalued at its current price? At what price do you feel the stock should sell? (5 points)

Explanation / Answer

4) Using information you estimated for (2) and (3) to calculate the 2011 share price of ABT stock according to the constant dividend growth model. (5 points)

VALUE = (0.0343)(1.0215) ÷ (0.0558 - 0.0215) =

0.03503745 ÷ (0.0343) = 1.0215 = 102.15% VALUE

(5) Using the P/E, P/CF, and P/S ratios estimate the 2011 share price for ABT. Use the average stock price each year to calculate the price ratios. (5 points)

P/E = 50.11/(50.11 x 1.0215) = 0.989

P/CF = 50.11/50.11 = 1

P/S = 50.11/(50.11 x 1.0343) = 0.966

These values are all less than or equal to 1, indicating that the stock price in 2011 will be about 97% of its current worth, or 50.11 x 0.97 = $48.61

(6) Given your answers in the previous questions, do you feel ABT is overvalued or undervalued at its current price? At what price do you feel the stock should sell? (5 points)

OVERVALUED, BECAUSE ITS STOCK IS ABOUT TO DECREASE IN VALUE

Value  = (Current Dividend * (1 + Dividend Growth))
(Required Return – Dividend Growth)

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