The market consensus is that Analog Electronic Corporation has an ROE = 9% and a beta of 1.25. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This years earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming years market return is 14%, and T-bills currently offer a %6 return.
a. Find the price at which Analog stock should sell.
b. Calculate the P/E ratio.
c. Calculate the present value of growth opportunities.
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. The market is still unaware of this decision. Explain why V0 no longer equals P0 and why V0 is greater or less than P0.