Company A and Company B are competitors in the software industry. Both firms will maintain the...

 

Transcribed Image Text:

Company A and Company B are competitors in the software industry. Both firms will maintain the same payout ratio in the next 5 years. Company A is trading at a dividend yield of 0.4% based on the dividend paid in in Year 0. In Year 0, Company A had EPS of $3 and paid a dividend of $0.3 per share. The ROE for Company A is 18%. (i) What is Company A's forward PE based on the expected EPS in Year 1? (1.5 points) Company B is trading at a PE multiple of 28.5 times the EPS in Year 0. In Year 0, Company B had EPS of $4.5 and paid a dividend of $0.54 per share. The ROE for Company B is 24%. (ii) What is Company B's PEG ratio based on the expected EPS in Year 1 and the expected growth rate for the next 5 years? (1.5 points) The software industry has a median forward PE of 22.5 times the expected earnings in Year 1 and a forecasted earnings growth rate of 18% p.a. for the next 5 years. (iii) If you believe that both Company A and B should be valued at the industry's PEG ratio (based on EPS in Year 1 and earnings growth rate for the next 5 years), which stock (A or B) would you buy at the current price? Quantify the upside potential (in percentage terms) of your investment choice. (2 points) Company A and Company B are competitors in the software industry. Both firms will maintain the same payout ratio in the next 5 years. Company A is trading at a dividend yield of 0.4% based on the dividend paid in in Year 0. In Year 0, Company A had EPS of $3 and paid a dividend of $0.3 per share. The ROE for Company A is 18%. (i) What is Company A's forward PE based on the expected EPS in Year 1? (1.5 points) Company B is trading at a PE multiple of 28.5 times the EPS in Year 0. In Year 0, Company B had EPS of $4.5 and paid a dividend of $0.54 per share. The ROE for Company B is 24%. (ii) What is Company B's PEG ratio based on the expected EPS in Year 1 and the expected growth rate for the next 5 years? (1.5 points) The software industry has a median forward PE of 22.5 times the expected earnings in Year 1 and a forecasted earnings growth rate of 18% p.a. for the next 5 years. (iii) If you believe that both Company A and B should be valued at the industry's PEG ratio (based on EPS in Year 1 and earnings growth rate for the next 5 years), which stock (A or B) would you buy at the current price? Quantify the upside potential (in percentage terms) of your investment choice. (2 points)

Answer rating: 100% (QA)

Valuation Analysis Company A vs Company B Company A i Forward PE based on expected EPS in Year 1 We ... View the full answer