FOR MORE CLASSES VISIT www.tutorialoutlet.com As a manager, it is important to understand how decisions can be analyzed in terms of alternative courses of action and their likely impact on a firm's value

1. Defend your choice of model, and explain why it is
appropriate
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Below is the information as of Mar. 20, 2015: Pfizer Inc. (PFE)
NYSE
Price $34.25 Mar 20, 4:02PM EDT
Beta: 0.89 P/E (ttm): 24.09 EPS (ttm): $1.42 Div & Yield: $1.12
(3.30%) Now you can assume that dividends will grow at a constant
rate
annually,
You can use the Dividend Discount Model (DDM) to find the
intrinsic value of this stock with the formula:
Po = [Do (1+g)]/(r-g) Where Po is the intrinsic value per share
g is the annual growth rate of dividends
r is the required rate of return for the stock using the Capital
Asset Pricing Model (CAPM):
r= riskfree rate + beta (market return – riskfree rate) Use the current
10-year Treasury bond rate for the riskfree rate of
return = 1.93% (in March) at www.cnbc.com or search at
google.com
S&P 500 Index return can be used for the market return = 12.4%
for 2014. (Source: http://money.cnn.com/data/markets/sandp/)
r= 1.93% + [0.89 (12.4% - 1.93%)] = 1.93% + 9.32% = 11.25% Do =
$1.12
g= – the dividend for last year retention ratio x ROE Payout ratio and
ROE for Pfizer are given under Key Statistics in
cnbc.com or finance.yahoo.com
Retention ratio = (1 – payout ratio) = (1 – 0.73) = 0.27 = 27%.
Payout ratio was given in finance.yahoo.com

2. ROE =
g=
Po = 12.30% (given) 0.27 x 12.30% = 3.32%. As a decimal, g =
3.32/100 = .0332 [Do(1+g)]/(r-g) = [$1.12(1+.0332)]/(11.25% -
3.32%) = ($1.12 x 1.0332)/(.1125 - .0332) = 1.1572/.0793 = $14.59
Compare Po to current market price of $34.25.
As a manager, it is important to understand how decisions can be
analyzed in terms
of alternative courses of action and their likely impact on a firm's
value. Thus, it is
necessary to know how stock prices can be estimated before
attempting to measure
how a particular decision might affect a firm's market value.
To prepare for this Assignment, choose a publicly-traded company,
and then
estimate your company's common stock price, using one of the
valuation models
presented in the assigned readings or outside readings.
Below is the information I received:
Pfizer Inc. (PFE)
NYSE
$34.25 Mar 20, 4:02PM EDT
Beta:
P/E (ttm):
EPS (ttm):
Div & Yield: 0.89
24.09
$1.42
$1.12 (3.30%) Use the 10-year Treasury bond rate for the riskfree rate
= 1.93% at www.cnbc.com or search at google.com of return
S&P 500 Index return can be used for the market return =
11.93%. Check google.com for 2014 return.

3. r = 1.93% + [0.89 (11.93% - 1.93%)]
= 1.93% + 8.90% = 10.83%
Do = $1.12 – the dividend for last year
g = retention ratio x ROE
Payout ratio and ROE for Pfizer are given under Key Statistics in
cnbc.com or finance.yahoo.com
retention ratio = (1 – payout ratio) = (1 – 0.73) = 0.27 = 27%.
Payout ratio was given in finance.yahoo.com
ROE = 12.30% (given)
g = 0.27 x 12.30% = 3.32%. As a decimal, g = 3.32/100 = .0332
Po = [Do(1+g)]/(r-g) = [$1.12(1+.0332)]/(10.83% - 3.32%)
= ($1.12 x 1.0332)/(.1083 - .0332)
= 1.1572/.0751 = $15.48
Compare Po to current market price of $34.25.
Step By Step Instructions - Week 4 Assignment
1. Select a public company other than Pfizer.
2. Go to http://finance.yahoo.com
Click on Market Data on the left of the screen.
Type name of company in Search Box on top of the screen and click
on Search Finance
button.
3. Write down the information on the stock such as last closing price,
beta of stock, EPS
and Dividend in dollars and cents.
4. On the left side of screen, click on Key Statistics under Company.
Note ROE as you scroll
down.
5. You have the basic information to calculate the intrinsic value of
the stock using the
constant growth assumption in the Dividend Discount Model (refer to
text readings).
6. a) Calculate the required rate of return (r) for the stock using the
Capital Asset Pricing

4. Model (CAPM).
r = (10-year Treasury Bond Yield) + [Beta (S&P 500 Index
Return - 10-year Treasury Bond
Yield)]
Search for 10-year Treasury Bond Yield using the Search box at
finance.yahoo.com.
S&P 500 Index Return for 2014 can be obtained at google.com.
Since the return for 2015
was negative, we can use the 2014 value of 11.39%.
Plug in the data and calculate the required rate of return using the
value for beta.
b) The constant growth rate of dividends, g = retention ratio x ROE
= (1 – payout ratio) x ROE
= [1 – (dividend per share/EPS)] x ROE.
g will be a percentage. Convert to a decimal by dividing by 100.
c) Intrinsic value of stock = Po = [Do (1 + g)]/(r – g)
Do is the dividend just paid while D1 = Do (1 + g) is the dividend to
be paid.
Knowing Do or D1, r and g, you can calculate the intrinsic value.