The market consensus is that Analog Electronic Corporation has an ROE = 11% and
ID: 2723193 • Letter: T
Question
The market consensus is that Analog Electronic Corporation has an ROE = 11% and a beta of 2.00. It plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $2.4 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 16%, and T-bills currently offer a 5% return.
Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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.)
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.)
The market consensus is that Analog Electronic Corporation has an ROE = 11% and a beta of 2.00. It plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $2.4 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 16%, and T-bills currently offer a 5% return.
Explanation / Answer
A./
Ke = Rf + BETA * (Rm - Rf)
= 5% + 2 (16% - 5%)
= 27%
GROWTH
= ROE * P/B RATIO
= 11% * 3/5
= 6.6%
D1 = $2.4 (1.066) * 2/5
= $1.02
P0 = D1 / (Ke - G)
= $1.02 / (27% - 6.6%)
= $5
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B./
P/E RATIO LEADING
EPS OF PERIOD 1 = $2.4 * 1.066
= $2.56
= MARKET PRICE PER SHARE / EARNNING PER SHARE 1
= $5 / $2.56
= 1.95
P/E RATIO TRAILLING
= MARKET PRICE PER SHARE / EPS 0
= $5 / $2.4
= 2.08
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C./
PVGO = P0 - (EPS OF PERIOD 1 / Ke)
= $5 - ($2.56 / 27% )
= $5 - $9.48
= -$4.48
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D./
GROWTH = ROE * PB RATIO
= 11% * 2/5
= 4.4%
D1 = $2.4 (1.044) * 3/5
= $1.50
INTRENSIC VALUE OF THE STOCK
= D1 / (Ke -G)
= $1.5 / (27% - 4.4%)
= $6.64
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