The market consensus is that Analog Electronic Corporation has an ROE of 9% and a beta of 2.05. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3.8 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 15%, and T-bills currently offer a 5% return.
a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 1/3. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

The entire number of buyers and sellers as in area or region under consideration is referred to as the market. The region might be the whole world, a nation, a state, or a city. The value, cost, the cost that traded goods depend on the market's supply and demand dynamics.

Briefing:

Growth Rate = ROE x b = 9% x 2/3 = 6%

CAPM, r = Rf + beta x (MRP - Rf) = 6% + 2.05 x (12% - 6%) = 18.30%

Current Dividend, D0 = 3.50 x 1/3 = 1.17

D1 = 1.17 x 1.06 = 1.24

P = D1/(r - g) = 1.24/(18.30% - 6%) = $10.05

Leading P/E: Leading Earnings, E1 = D1 x 3 = 1.24 *3 = $3.71 => Leading P/E = 10.05/3.71 = 2.71

Trailing P/E = 10.05/3.5 = 2.87

PVGO = P - E1/r = 10.05 - 3.71/18.30% = -$10.219

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