Question

QUESTION 1 Tri-coat Paints' stock has a current market value of $50 per share with an expected earnings per share of $3.64 next year. Instructions What should be the present value of its growth opportunities (PVGO) if the required return is | 9%? Assume that there is no mispricing. QUESTION 2 The market consensus is that Analog Electronic Corporation has an ROE of 9%, has a beta of the stock of 1.30, and plans to maintain indefinitely its traditional plowback ratio of 1/3. The latest earnings were $2.90 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 11%, and T-bills currently offer a 5% return. Instructions Find the price at which Analog stock should sell.

Answer 1

1.
=Market Price-Expected EPS next year/required return
=50-3.64/9%
=9.555555556

2.
required return=risk free rate+beta*(market return-risk free rate)=5%+1.30*(11%-5%)=12.8000%

Price=Last Earnings*(1+growth rate)*payout rate/(required return-growth rate)=Last Earnings*(1+ROE*plowback ratio)*(1-plowback ratio)/(required return-ROE*plowback ratio)=2.90*(1+9%*1/3)*(1-1/3)/(12.800%-9%*1/3)=20.31972789