4.20 Market Multiples and Reverse Engineering Share Prices. In 2000, Enron enjoyed remarkable success in the capital markets. During that year, Enron's shares increased in value by 89%, while the S&P 500 index fell by 9%. At the end of 2000, Enron's shares were trading at roughly $83 per share, and all of the sell-side analysts following Enron recommended the shares as a "buy" or a "strong buy." With 752.2 million shares out- standing, Enron had a market capitalization of $62,530 million and was one of the largest firms (in terms of market capital) in the United States. At year-end 2000, Enron's book value of com- mon shareholders' equity was $11,470 million. At year-end 2000, Enron posted earnings per share of $1.19. Among sell-side analysts following Enron, the consensus forecast for earnings per share was $1.31 per share for 2001 and $1.44 per share for 2002, with 10% earnings growth expected from 2003 to 2005. At the time, Enron was paying dividends equivalent to roughly 40% of earnings and was expected to maintain that payout policy. At year-end 2000, Enron had a market beta of 1.7. The risk-free rate of return was 4.3%, and the market risk premium was LO 14-4 9 5.0%. (Note: The data provided in this problem, and the inferences you draw from them, do not depend on foresight of Enron's declaring bankruptcy by the end of 2001.) REQUIRED . Uhe the CAPM to compute the required rate of retum on commoeq Enron. b. Use year-end 2000 data to compute the following ratios for Enron: (1) Market-to-book (2) Price-earnings (using 2000 earnings per share) (3) Forward price-earnings (using consensus forecast earnings per share for 2001) c. Reverse engineer Enron's $83 share price to solve for the implied expected return on Enron shares at year-end 2000. Do the reverse engineering under the following assumptions: 1) Enron's market price equals value. (2) The consensus analysts' earnings-per-share forecasts through 2005 are reliable prox- ies for market expectations (3) Enron will maintain a 40% dividend payout rate. (4) Beyond 2005, Enron's long-run earnings growth rate will be 30%. d. What do these analyses suggest about investing in Enron's shares at a price of $83? 4.20 Market Multiples and Reverse Engineering Share Prices. In 2000, Enron enjoyed remarkable success in the capital markets. During that year, Enron's shares increased in value by 89%, while the S&P 500 index fell by 9%. At the end of 2000, Enron's shares were trading at roughly $83 per share, and all of the sell-side analysts following Enron recommended the shares as a "buy" or a "strong buy." With 752.2 million shares out- standing, Enron had a market capitalization of $62,530 million and was one of the largest firms (in terms of market capital) in the United States. At year-end 2000, Enron's book value of com- mon shareholders' equity was $11,470 million. At year-end 2000, Enron posted earnings per share of $1.19. Among sell-side analysts following Enron, the consensus forecast for earnings per share was $1.31 per share for 2001 and $1.44 per share for 2002, with 10% earnings growth expected from 2003 to 2005. At the time, Enron was paying dividends equivalent to roughly 40% of earnings and was expected to maintain that payout policy. At year-end 2000, Enron had a market beta of 1.7. The risk-free rate of return was 4.3%, and the market risk premium was LO 14-4 9 5.0%. (Note: The data provided in this problem, and the inferences you draw from them, do not depend on foresight of Enron's declaring bankruptcy by the end of 2001.) REQUIRED . Uhe the CAPM to compute the required rate of retum on commoeq Enron. b. Use year-end 2000 data to compute the following ratios for Enron: (1) Market-to-book (2) Price-earnings (using 2000 earnings per share) (3) Forward price-earnings (using consensus forecast earnings per share for 2001) c. Reverse engineer Enron's $83 share price to solve for the implied expected return on Enron shares at year-end 2000. Do the reverse engineering under the following assumptions: 1) Enron's market price equals value. (2) The consensus analysts' earnings-per-share forecasts through 2005 are reliable prox- ies for market expectations (3) Enron will maintain a 40% dividend payout rate. (4) Beyond 2005, Enron's long-run earnings growth rate will be 30%. d. What do these analyses suggest about investing in Enron's shares at a price of $83