Question

3. Use the following financial information to answer the questions that follow: 20 points Verizon AT&T $16.1 Billion $16.4 Billion Net Income 3.23% 7.21% Return on Assets $182 Billion $132 Billion Revenue Total Debt $197 Billion $132 Billion $59.51 $39.50 Stock Price Dividends per share EPS $2.46 $2.04 $2.23 $3.89 Compare AT&T's and Verizon's retention ratio and dividend yield. Discuss what factors contributed to each firm's ROE using the Dupont analysis. (NPM, TAT, EM) 4. Determine the expected price of Verizon's stock next year using the dividend discount model and the internal growth rate. 10 points

Answer 1

3]

Retention ratio

Retention ratio = (EPS - DPS) / EPS

AT&T = (2.23 - 2.04) / 2.23 = 8.52%

Verizon = (3.89 - 2.46) / 3.89 = 36.76%

The retention ratio of Verizon is much higher than AT&T.

Dividend yield

Dividend yield = DPS / stock price

AT&T = 2.04 / 39.50 = 5.16%

Verizon = 2.46 / 59.51 = 4.13%

ROE = NPM * TAT * EM

NPM = net income / revenue

TAT = revenue / total assets = revenue / total assets

total assets =  net income / return on assets

EM = total assets / equity = total assets / (total assets - total debt)

AT&T

NPM = $16.4 billion / $182 billion = 9.01%

total assets = $16.4 billion / 3.23% = $507.74 billion

TAT = $182 billion / $507.74 billion = 0.36 times

EM = $507.74 billion / ($507.74 billion - $197 billion) = 1.63

ROE = 9.01% * 0.36 * 1.63 = 5.29%

Verizon

NPM = $16.1 billion / $132 billion = 12.20%

total assets = $16.1 billion / 7.21% = $223.30 billion

TAT = $132 billion / $223.30 billion = 0.59 times

EM = $223.30 billion / ($223.30 billion - $132 billion) = 2.45

ROE = 12.20% * 0.59 * 2.45 = 17.64%

Verizon has a much higher ROE due to is higher NPM, higher TAT and higher EM.