Christie Johnson, CFA, has been assigned to analyze Sundanci using the constant dividend growth price/earnings (P/E) ratio model. Johnson assumes that Sundanci’s earnings and dividends will grow at a constant rate of 13%.

a. Calculate the P/E ratio based on information in Tables A and B and on Johnson’s assumptions for Sundanci.

b. Identify, within the context of the constant dividend growth model, how each of the following factors would affect the P/E ratio.

• Risk (beta) of Sundanci.

• Estimated growth rate of earnings and dividends.

• Market riskpremium.

Transcribed Image Text:

Table A Income Statement 2007 2008 Revenue Depreciation Othe Income before taxes Taxes Net income Dividends Earnings per share Dividend per share Common shares outstanding (millions) Balance Sheet Current assets Net property, plant and equipment 474 20 368 86 26 60 18 $0.714 $0.214 84.0 598 23 460 115 35 80 24 $0.952 0.286 84.0 2008 326 489 815 141 r operating costs 2007 S 201 474 675 57 Total assets Current liabilities Long-term debt 57 618 675 34 141 674 815 38 Total liabilities Shareholders' equity Total liabilities and equity Capital expenditures Table B Required rate of return on equity Growth rate of industry Industry P/E ratio 14% 13% 26