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British Petroleum Investment Analysis and Recommendation

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Please establish an estimated growth rate in earnings and dividends for British Petroleum (BP). Note, in the dividend growth model, "g" is the growth rate for earnings AND dividends. You might want to check historical growth rates for BP (in terms of earnings and dividends). Also, many people rely on analyst forecasts. Be sure to justify your growth rate selection and explain how you arrived at the number. Assume BP is a constant growth stock. Use your estimated growth rate to solve for the required rate of return using the dividend discount model. After completing your calculations, respond to the following:

• Does the number you arrived at seem logical or feasible?
• Did you face any problems or issues using the dividend growth model? Does BP pay a dividend?
• Is it reasonable to assume constant growth for your company?

Write up a 1-page summary of your findings, including any calculations you made, and how you gathered your information.

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Solution Preview

I will provide you with the basic idea and some point-form notes that you can use to develop your 1 page summary.

First, let us find the current and historical dividend payments for BP. The page below gives you the historical dividend payments for the past 25 years.

http://dividendhistory.org/payout/BP/

Let's look at these numbers, do you think that the dividend payments are constantly growing? Well, it seems so for the past 10 years (to 5/5/2010). Before that BP pays dividends every quarter, but after this point, it not only missed two payments (Aug 2010 and Nov 2010), and its dividend payment was reduced by half (from 84 ...

Solution Summary

The British Petroleum investment analysis and recommendations are provided. Whether it is reasonable to assume constant growth for a company are given.

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Investment Analysis and Recommendation for British Petroleum

Please find an estimate of beta for British Petroleum (BP). Please consider examining or using an industry average beta, especially if the reported beta you find seems unrealistic or inappropriate.

Note: You should probably check the beta across a few different sources, because sometimes they vary. Please find the current interest rate (yield) for 3-month treasury bills. Determine an appropriate market risk premium. Please also consider the size of BP when estimating an appropriate premium.

Questions:

After making the calculations:

1. Using all this information, what is the expected return for BP using CAPM?

2. Last week I estimated a required rate of return of 10% for BP using the dividend discount model. How does the CAPM number compare?

Please write up a 1-page summary of your findings, including any calculations you might have made.

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