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The market consensus is that Analog Electronic Corporation has an ROE = 13%, has

ID: 2720123 • Letter: T

Question

The market consensus is that Analog Electronic Corporation has an ROE = 13%, has a beta of 2.00, and plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $3.40 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 11%, and T-bills currently offer a 5% return.

a. Find the price at which Analog stock should sell.

I found this answer which is $15.94

b. Calculate the P/E ratio (I found the trailing P/E but have no clue how to find the leading)

            Leading: _____

            Trailing: 4.69

c. Calculate the present value of growth opportunities (Do not round intermediate calculations. Round your answer to 2 decimal places).

Explanation / Answer

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

= 5 + 2*(11-5) = 17%

growth rate = ROE*plowback ratio

= 13*3/5 = 7.8%

Future EPS = EPS*(1 + growth rate) = 3.4*(1 + 0.078) = 3.6652

DPS = EPS*(1- plowback ratio) = 3.6652*(1-3/5) = 1.46608

Price = DPS/(required rate - growth rate) = 1.46608/(.17-0.078) = 15.936

Leading PE = price/Leading EPS = 15.936/3.6652 = 4.348

c) Stock price = No growth value + PVGO

No growth value = DPS/required rate = 1.46608/.17 = 8.624

PVGO = 15.936 - 8.624 = 7.312