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Intrinsic value of HP stock

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1. The dividends of Charles Schwab Co. are expected to grow indefinitely by 5% per year.
a. If this year's year-end dividend is $8 and the firm's required rate of return is 10% per year, what must the current stock price be according to the DDM?
b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities?
c. How much is the market paying per share for growth opportunities (i.e. for an ROE in future investments that exceeds the required rate of return securities of this risk class?

2. The risk-free rate of return is 8%, the expected return on the market portfolio is 15%, and the stock of HP has a beta coefficient of 1.2. HP pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were just paid and are expected to be paid annually. You expect that HP will earn an ROE of 20% on all reinvested earnings forever.
a. What is the intrinsic value of HP stock?
b. If the market price of a share of HP is currently $100, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected one-year holding period return on HP stock?

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Solution Preview

1. The dividends of Charles Schwab Co. are expected to grow indefinitely by 5% per year.

a. If this year's year-end dividend is $8 and the firm's required rate of return is 10% per year, what must the current stock price be according to the DDM?

P0= $168.00
Div1= Expected dividend per share next year.
G=Growth 5%
Ke= Cost of equity 10%
Div1= Current dividend *(1+g) =8.4

b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment ...

Solution Summary

The intrinsic value of HP stock is assessed.

$2.19
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Recognition of Benefit plans: HP financial statement disclosures in the 10K

Please review the attached questions and 10k. I need simple, two line explanations for each.

1. HP provides disclosures related to its pension plans in Note 15 (pp. 129-135). Please answer the following questions based on your reading of this footnote. With respect to only the US Defined Benefit plans and only in 2004, please answer the following questions:

a. By what dollar amount did these plans affect profit?

b. Briefly explain how a company can report net pension income (vs. pension expense) at the same time it is realizing a negative return on pension investments.

c. Provide computations to yield (approximately) the $266 million in interest cost that HP reports as a component of pension expense for its US Defined Benefit plans in 2004.

d. HP has reduced its discount rate in each of the past 2 years. Briefly explain the general effect (no dollar amounts) that this rate reduction has on its balance sheet and income statement:

1. balance sheet

2. income statement

e. What amount of cash benefits did HP pay to its retirees for its US Defined Benefit plans in 2004?

f. What amount of cash contribution did HP make to its US Defined Benefit plans in 2004?

g. Is the HP US Defined Benefit plan over-funded or under-funded and by what amount?
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