1. Compute a recent five-year average of the following ratios for three companies of your choice (attempt to select diverse firms):
a. Retention rate
b. Net profit margin
c. Equity turnover
d. Total asset turnover
e. Total assets/equity
Based on these ratios, explain which firm should have the highest growth rate of earnings.
2. You have been reading about the Maddy Computer Company (MCC), which currently retains 90 percent of its earnings ($5 a share this year). It earns an ROE of almost 30 percent. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Discuss your answer. What would you pay for Maddy Computer if its retention rate was 60 percent and its ROE was 19 percent? Show your work.
3. Gentry Can Company’s (GCC) latest annual dividend of $1.25 a share was paid yesterday and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock today because you believe that the dividend growth rate will increase to 8 percent for the next three years and the selling price of the stock will be $40 per share at the end of that time.
a. How much should you be willing to pay for the GCC stock if you require a 12 percent return?
b. What is the maximum price you should be willing to pay for the GCC stock if you believe that the 8 percent growth rate can be maintained indefinitely and you require a 12 percent return?
c. If the 8 percent rate of growth is achieved, what will the price be at the end of Year 3, assuming the conditions in Part b?
