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1. What is the current market capitalisation of the Commonwealth Bank?
2. Explain and illustrate how the market capitalisation and the price per share are related.
3. What is the historical (marked 'TTM') P/E ratio of the Commonwealth Bank?
4. Show how this P/E ratio and the earnings per share ('TTM') of the Commonwealth Bank are related.
5. Assume that next year's expected dividend is $4.63 per share. Suppose that this dividend is expected to increase by 3% per year, and that investors require an expected return of 8% per year to invest in the shares of banks with a similar risk to the Commonwealth Bank. Use Gordon's Dividend Growth Model to value these shares.
6. Do the shares look undervalued or overvalued, based on your valuation?
7. What are the two principal determinants of price-earnings ratios, according to Gordon's model? Explain why each is important.