The market consensus is that Analog Electronic Corporation has an ROE = 8% and a
ID: 2788843 • Letter: T
Question
The market consensus is that Analog Electronic Corporation has an ROE = 8% and a beta of 1.35. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $2.2 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 6% 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.)
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 1/3. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
P/E ratio Leading TrailingExplanation / Answer
a)
Re = 6% + 1.35*(16% - 6%) = 19.5%
Plowback = retention
g = (2/3) *8% = 5.33%
D1 = 2.2*(1+5.33%)*(1/3) = 0.77
P = 0.77 / (19.5% - 5.33%) = 5.45
b)
leading PE = 5.45 / (2.2*(1+5.33%) ) = 2.35
traling PE = 5.45 / 2.2 = 2.48
c)
PVGO = 5.45 - (2.2*(1+5.33%) / 19.5%) = -6.43
d)
g = (1/3) *8% = 2.67%
D1 = 2.2*(1+2.67%)*(2/3) = 1.51
P = 1.51 / (19.5% - 2.67%) = 8.95
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