Valuing Dividends or Return on Equity: General Motors Corp (Easy)

In April 2005, General Motors traded at $28 per share on book value of $49 per share.

Analysts were estimating that GM would earn 69 cents per share for the year ending December 2005. The firm was paying an annual dividend at the time of $2.00 per share.

a. Calculate the price-to-book ratio (P/B) and the return on common equity (ROCE) that analysts were forecasting for 2005.

b. Is the P/B ratio justified by the forecasted ROCE?

c. An analyst trumpeted the high dividend yield as a reason to buy the stock. (Dividend yield is dividend/price.) “A dividend yield of over 7 percent is too juicy to pass up,” he claimed. Would you rather focus on the ROCE or on the dividend yield?

Real World Connection Exercises E2.12 and E4.10 also deal with General Motors.