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Title: Cash flow valuation Post by: Tarel on Nov 10, 2022 The market consensus is that Analog electronic corporation has an ROE=10% and a beta of 1.2 it plans to maintain indefinitely its traditional plow back ratio of 2/3. This year earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year market return is 14% and t-bills currently offer a 6% return.
A) Use the CAMP to get the cost of equity: rE= B) Using the plowback info, the current dividend: D0= C) The growth rate of dividends is g= D) Next year dividend is D1= E) The price of the stock is P0= F) The current P0/E0 ratio is ….. and the forward P0/E1 ratio is ….. G) The PVGO is P0-E1/rE= Title: Re: Cash flow valuation Post by: foxrcng11 on Nov 10, 2022 Cost of equity = Risk free rate + Beta * (Market return - Risk free rate)
Cost of equity = 6% + 1.2 * (14% - 6%) Cost of equity = 15.6% Current Dividend (D0) = Current Earnings * (1 - Plowback ratio) Current Dividend (D0) = $3 * (1 - (2 / 3)) Current Dividend (D0) = $1 growth rate = Plowback ratio * ROE growth rate = (2/3) * 10% growth rate of dividends = 6.67% Next year’s dividend = Current Dividend * (1 + growth rate of dividends) Next year’s dividend = $1 * (1 + 6.67%) Next year’s dividend = $1.0667 Price of Stock (P0) = Current Dividend * (1 + growth rate of dividends) / (Cost of Equity - growth rate of dividends) Price of Stock (P0) = $1 * (1 + 6.67%) / (15.6% - 6.67%) Price of Stock (P0) = $11.95 P0/E0 ratio = (1 - Plowback Ratio) * (1 + growth rate of dividends) / (Cost of Equity - growth rate of dividends) P0/E0 ratio = (1 - (2/3) * (1 + 6.67%) / (15.6% - 6.67%) P0/E0 ratio = 3.98 P0/E1 ratio = (1 - Plowback Ratio) / (Cost of Equity - growth rate of dividends) P0/E1 ratio = (1 - (2/3)) / (15.6% - 6.67%) P0/E1 ratio = 3.73 PVGO = P0 - (Earnings * (1 + growth rate) / Cost of Equity) PVGO = $11.95 - ($3 * (1 + 6.67%) / 15.6%) PVGO = -$8.56 |