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Normal EPS for GE based on the method of average ROE

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Refer to the following data to answer the following questions below.
GEN ELECTRIC CO - Report History
General 12mos(2) 2006 2005 2004 2003 2002 2001
Total Revenues, $M: NA 163391.0 148019.0 151300.0 132890.0 130685.0 125679.0
Depreciation & Amort, $M: NA 9158.0 8538.0 8385.0 6956.0 5998.0 7089.0
Operating Income, $M: NA 44814.0 36619.0 31878.0 29836.0 28420.0 30877.0
Net Income, $M: NA 20829.0 16353.0 16593.0 15589.0 15133.0 14128.0
Earnings Per Share, $: NA 2.00 1.54 1.59 1.55 1.51 1.41
Dividends, $: NA 1.00 .88 .80 .76 .72 .64
Balance Sheet 12mos(2) 2006 2005 2004 2003 2002 2001
Current Assets, $M: NA 438728.0 87480.0 174875.0 152872.0 145700.0 128254.0
Current Liabilities, $M: NA 220514.0 204927.0 206280.0 176530.0 181827.0 198904.0
Long Term Debt, $M: NA 260804.0 212281.0 213161.0 170004.0 140632.0 79806.0
Shares Outstanding, K: NA 10277373 10484268 10586358 10063120 9969894 9925938
Common Equity, $M: NA 112314.0 109354.0 110284.0 79180.0 63706.0 54824.0
Ratios 12mos(2) 2006 2005 2004 2003 2002 2001
Profit Margin, %: NA 12.7 11.0 11.0 11.7 11.6 11.2
Return on Equity, %: NA 18.5 15.0 15.0 19.7 23.8 25.8
Return on Assets, %: NA 3.0 2.4 2.2 2.4 2.6 2.9
P/E Ratio: NA 18.7 20.4 23.0 20.0 16.1 28.4
Price/Book: NA 3.40 3.36 3.50 3.94 3.81 7.26
Debt Equity: NA 2.32 1.94 1.93 2.15 2.21 1.46
Interest Coverage: NA 2.3 2.5 2.7 2.9 2.8 2.8
Book Value, $: NA 10.93 10.43 10.42 7.87 6.39 5.52
Price/Sales: NA 2.34 2.48 2.55 2.35 1.86 3.17
Dividend Payout, %: NA 50.00 57.14 50.31 49.03 47.68 45.39
*NA - Not Available *NM - Not Meaningful *NC - Not Calculable
*NE - Negative Earnings *NS - Negative Stockholders Equity

A. Calculate a normal EPS for GE based on the method of average ROE for the period 2001 through 2006.

B. Assuming GE stock data for 2006, calculate the implied price of GE stock and the leading P/E (2007) using sustainable growth for 2006.

C. Calculate the expected 2006 P/BV using ROE, sustainable growth, and required return for 2006. How does it compare with the reported P/BV? What may be a factor in the discrepancy?

D. Calculate the unexpected earnings (earnings surprise) for GE in 2006.

E. The prices for the Dow Index and GE over the last nine months of 2007 are:
Dow GE
Jan 12,622 35.51
Feb 12,269 34.66
Mar 12,254 35.11
Apr 13,063 36.60
May 13,628 37.31
Jun 13,409 38.28
Jul 13,212 38.76
Aug 13,358 38.87
Sep 13,113 39.19
Calculate the relative strength of GE compared to the Dow in the month of April AND interpret its meaning.

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Question A
Normal EPS = Average ROE over the most recent full business cycle * current BV of equity per share
Average ROE = (18.5 + 15.0 + 15.0 + 19.7 + 23.8 + 25.8 /6) = 19.63
Normal EPS = 19.63 * 10.93 = $ 214.59
Question B
Market price = P/E ratio * EPS
Stock price = 18.7 * 2
Stock price = $ ...

Solution Summary

The expert calculates a normal EPS for GE based on the method of average ROE.

$2.19