S&P 500 Valuation (CH 12)
Download Excel file sp-500-eps-est.
a. Let’s use the analyst’s estimate of 2015 operating earnings of $118.59 in the Estimates&PEs tab.
b. On the Quarterly Data tab, forecast the dividend payout ratio for the historical time series.
c. On the Quarterly Data tab, forecast the dividend yield for the historical time series.
d. With your forecasted dividend payout ratio, and dividend yield use equation 12.6 to compute the forward earnings multiple.
e. Estimate the value of the S&P 500
f. Is the market fairly valued, undervalued, or overvalued?
1. A company currently pays a dividend of $3.25 per share (D0 = $3.25). It is estimated that the company’s dividend will grow at a rate of 21% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.05, the risk-free rate is 4.5%, and the market risk premium is 6%. What is your estimate of the stock’s current price?
2. Assume that the average firm in your company’s industry is expected to grow at a constant rate of 4% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1 = D0(1 + g) = D0(1.50)] this year and 30% the following year, after which growth should return to the 4% industry average. If the last dividend paid (D0) was $2.25, what is the value per share of your firm’s stock?