In 2010, some fundamental investors believed that Microsoft, after being overpriced in the stock market for many

Question:

In 2010, some fundamental investors believed that Microsoft, after being overpriced in the stock market for many years, was now a firm to buy. Microsoft's shares traded at $24.30 in September 2010, down from a peak of $60 (split-adjusted) in January 2000.

Analysts' consensus earnings-per-share forecasts for Microsoft's 2011 and 2012 fiscal years (ending in June) were $2.60 and $2.77, respectively. A dividend of $0.40 per share was indicated for fiscal year 2011.

a. Calculate Microsoft's normal forward PIE and the forward PIE at which it traded in September 2010. Use a required return of 9 percent.

b. Calculate the intrinsic PIE implied by the analysts' forecasts with the assumption that there will be no abnormal earnings growth after 2012.

c. If you forecast that there will be significant abnormal earnings growth after 2012, do you think this stock is appropriately priced a t $24.30?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...