Reverse Engineering with Two-stage Growth Rates (Medium)

An analyst develops the following pro forma at the end of 2009 (in millions):

a. Forecast the cum-dividend operating income growth rate for 2011 using a 9 percent return for reinvesting cash flows.

b. You consider 9 percent to be a reasonable return for investing in the operations of this firm and also view the GDP growth rate of 4 percent to be a reasonable long-term growth rate. The 450 million shares of the firm are trading at $52 each. Do you consider them to be cheap or expensive?

2009A 2010E 2011E Operating income $ 782 Net operating assets $6,400 6,848 $ 868 7,190 Net financial obligations 756 Common equity $5,644