The market consensus is that Analog Electronic Corporation has an ROE = 10% and
ID: 2785020 • Letter: T
Question
The market consensus is that Analog Electronic Corporation has an ROE = 10% and a beta of 2.20. It plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $4.4 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 15%, and T-bills currently offer a 5% return. a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price $ b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.) P/E ratio Leading Trailing c. 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.) PVGO $ d. 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.) Intrinsic value of the stock $
Explanation / Answer
Required rate of return = 5% + (15% - 5%) × 2.20
= 5% + (10% × 2.20)
= 5% + 22%
= 27%
Required rate of return is 27%.
Retention ratio = 60%
Payout ratio = 40%.
Growth rate = Retention ratio × Return on equity
= 60% × 10%
= 6%.
Growth rate is 6%.
a.
This year dividend = $4.40 × 40%
= $1.76
Stock price = $1.76 × (1 + 6%) / (27% - 6%)
= $1.87 / 21%
= $8.88
Current stock price of company is $8.88.
b.
P / E ratio = $8.88 / $4.40
= 2.02
P / E ratio of comapny is 2.02.
c.
Stock price without growth rate = $4.40 / 27%
= $16.30.
Stock price without growth rate is $16.30.
present value of growth opportunities = $8.88 - $16.30
= -$7.42.
present value of growth opportunities is -$7.42.
d.
Ne plowback ratio = 40%
Payout ratio = 60%.
This year dividend = $4.40 × 60%
= $2.64
Growth rate = 10% × 40%
= 4%
New Growth rate is 4%
Stock price = $2.64 × (1 + 4%) / (27% - 4%)
= $2.75 / 23%
= $11.94
New, Current stock price of company is $11.94
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