Please answer the following questions (show calculations where necessary) and submit for grading:
1. In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm? Why?
2. Johnson & Johnson has a ROE of 19% and a plowback ratio of 50%. If the coming year’s earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 12%.
What price do you expect Johnson & Johnson shares to sell for in three years?
3. Choose two firms of interest from fiance.yahoo.com, finance.google.com, or money.msn.com and download their financial statements. For each firm:
a. Write the ROE, the number of shares outstanding, the dividends per share, and the net income.
b. Compute the sustainable growth rate (g = b * ROE), where b equals the plowback ratio.
c. Calculate the total amount of dividends paid (dividends * number of shares outstanding), the dividend payout ratio (total dividends paid/net income), and the plowback ratio (1 – dividend payout ratio).
d. What does this information reveal about the ROE for the firms you selected?
Be sure to include the link for the financial statements that you select.