Question: Growth for a Hot Stock: Netti ix (Easy) Netflix delivers movies for home entertainment, initially via efficient mail distribution but with prospects of dominating the new technology of electronic delivery. With the failure of Blockbuster and other traditional retail outlets, Net:flix was a market favorite in 2011, trading at $157 per share and a forward PIE of 42. Analysts were forecasting EPS of$3.71 for 2011 and $4.84 for 2012 on a book value per share at the end of2010 of$5.50. The firm pays no dividends. You have a required return of 11 percent for this company: With so much growth built into the price, you see it as risky.
a. How much of the $157 price is value the market places on growth?
b. What is the expected growth rate for residual earnings that is implicit in the market price? Do you consider this growth rate normal?