Monfort, Inc., had EPS of $1.50 over its most recent period on sales of $50 per share. Total assets per share is $25 and its equity multiplier is 4. Monfort paid a dividend per share of $0.45 for the most recent period. In addition the estimated beta for Monfort's stock is 1.5. The expected return on SP500 index is 13% and the ratte of return on 10year T-note is 3%. Based on the above information estimate the current price of the stock.
Given about Monfort, Inc.
EPS = $1.50
Sales = $50 per share
Total assets = $25 per share
Equity multiplier = 4
=> ROE of the company = (EPS/total assets)*equity multiplier = (1.5/50)*4 = 12%
dividend paid D0 = 0.45
So, dividend payout ratio = D0/EPS = 0.45/1.5 = 30%
So, this, sustainable growth rate of the firm g = ROE*RR = 12*(1-0.3) = 8.4%
Beta of the stock = 1.5
Risk free rate Rf = 3%
Expected return on market Rm = 13%
So, using CAPM, cost of equity of firm = Rf + Beta*(Rm - Rf)
=> Ke = 3 + 1.5*(13-3) = 18%
So, using constant dividend growth rate, price of the stock today is
P0 = D0*(1+g)/(Ke - g) = 0.45*1.084/(0.18-0.084) = $5.08
So, current price of stock is $5.08
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