Abbott Laboratories (ABT) engages in the discovery, development, manufacture, an

Question

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of a line of health care and pharmaceutical products. Below you will find selected information from Value Line. Use theValue Line estimated 2009 figures as the actual year-end figures for the company. The beta reported was 0.80 and the risk-free rate was 3.63 percent. Assume a market risk premium of 6 percent.

Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios.

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of a line of health care and pharmaceutical products. Below you will find selected information from Value Line. Use theValue Line estimated 2009 figures as the actual year-end figures for the company. The beta reported was 0.80 and the risk-free rate was 3.63 percent. Assume a market risk premium of 6 percent.

Explanation / Answer

We will have to calculate the stock price (PO) today with the use of information provided in the question. For that, we need to determine the growth rate and required return. The formula for calculating the same are given below:

Growth Rate = Return on Equity*Retention Ratio where Retention Ratio (Earnings Per Share - Dividend Per Share)/EPS*100

Required Return = Return on Total Capital Percentage

The formula for calculating price is given below:

Price (P0) = D1/(Required Return - Growth Rate) where D1 = D0*(1+Growth Rate)

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Expected return = 3.63 + 0.80(6.00) = 8.43%

Using the values provided in the question, we get,

Retention Ratio = (4.15 - 1.76) / 4.15 = 57.59%

Growth Rate = 28%*57.59% = 16.13%

P0 = 1.76 * (1+16.13%) / (21% - 16.13%) = $41.93

_____________

Now, we can calculate the P/E, P/CF, and P/S ratios as follows:

P/E = Price Per Share/Earnings Per Share = 41.93/4.15 = $10.10

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P/CF = Price/Cash Flow = 41.93/5.50 = $7.62

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P/S = Price/Sales Ratio = 41.93/21.45 = $1.95

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