At year-end 1991, the Wall Street consensus was that Philip Morris's earnings and dividends would grow at 20% for five years, after which growth would fall to a marketlike 7%. Analysts also projected a required rate of return of 10% for the U.S. equity market.
a. Using the data in the accompanying table and the multistage dividend discount model, calculate the intrinsic value of Philip Morris stock at year-end 1991. Assume
a similar level of risk for Philip Morris stock as for the typical U.S. stock.
b. Using the data in the accompanying table, calculate Philip Morris's price-earnings ratio and the price-earnings ratio relative to the S&P 500 Stock Index as of December 31, 1991.
c. Using the data in the accompanying table, calculate Philip Morris's price-book ratio (i.e., ratio of market value to book value) and the price-book ratio relative to the S&P 500 Stock Index as of December 31, 1991.
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Philip Morris Corporation
Selected Financial Data
Years Ending December 31
($ millions except per share data)
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1991
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1981
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Earnings per share
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$4.24
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$0.66
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Dividends per share
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$1.91
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$0.25
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Stockholders' equity
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12,512
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3,234
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Total liabilities and stockholders' equity
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47,384
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$9,180
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Other data
Philip Morris
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Common shares outstanding (millions)
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920
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1,003
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Closing price common stock
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$80.250
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$6.125
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S&P 500 Stock Index:
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Closing price
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417.09
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122.55
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Earnings per share
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16.29
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15.36
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Book value per share
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161.08
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109.43
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