The stock of Company B has a beta of 1.25. The consensus estimate of next year's equity market return is 10% and the risk-free rate is 2%. The company had earnings of $5 per share last year and the company pays out 40% of earnings as dividends. The company's business typically generate a return on equity of 15%.
(a) What is the expected return on the equity?
(b) What is the capitalization rate?
(c) What was the dividend last year?
(d) What will be the dividend next year?
(e) What is the growth rate of dividends?
(f) What is the growth rate of earnings?
(g) What is the growth rate of the book value of equity?
(h) What is the earnings per share for next year?
(i) What is the intrinsic value of the stock?
(j) If the stock is currently trading at $30, is the stock overpriced or underpriced?
(k) Would you buy or sell the stock?
(l) What is the no growth value of the stock?
(m) What is the present value of growth opportunities? or P/E ratios the price is at a point in time while the earnings occur over a period of time. It is, therefore, necessary to specify whether the earnings are for the trailing twelve month period (TTM) or for the next twelve month period (NTM). The P/E based on NTM earnings is called a forward P/E. (Note: there can be other variations if you are not at the end of a fiscal or calendar year).
(n) What is the forward P/E ratio (based on NTM earnings)?
(o) What is the P/E ratio based on TTM earnings?