Locate the single firm in your portfolio that you believe has the most potential investment potential over the next year. For that firm:
- From edgar-online.com (Links to an external site.)
- , look up the company's most recent quarterly 10Q report as filed with the Securities and Exchange Commission.
- Find the ROE, the number of shares outstanding, dividends per share, and net income. Record them in a spreadsheet. From this information,
- Calculate the total amount of dividends paid (dividends per share * number of shares outstanding)
- Calculate the payout ratio (total dividends paid/net income)
- Calculate the plowback ratio (1-dividend payout rate)
- Compute the sustainable growth rate. ( g= b * ROE, where b equals the plowback ratio)
- Compare the calculated sustainable growth rate you calculated in 3 above with the P/E ratios over the last three years. (Plot the P/E ratios over the calculated sustainable growth rates in a scatter diagram. Describe the relationships between the two measures.
- Compare the three year three-year growth rate of earnings per share with the growth rate you calculated above. Is the actual rate of earnings growth correlated with the sustainable growth rate you calculated? Explain.
- Now calculate the intrinsic value of the firm. Make reasonable judgments about the market risk premium and the risk-free rate, or find estimates online, clearly identifying them.
- What is the required return on the firm based on the CAPM? You can locate the beta for your firm from your Nasdaq portfolio or other sources.
- Now, using a two-stage growth model, make reasonable assumptions about how future growth rates will differ from current growth rates and calculate a new rate. Clearly identify your assumptions and rationale for choosing those rates.