After the market closed on July 27, Google announced earnings of $5.2 per share in the...

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After the market closed on July 27, Google announced earnings of $5.2 per share in the last quarter. As a result, Google's stock price closed at $116 on July 28. Currently Google's quarterly earnings growth is 5.2%. Apparently, investors are bidding up the price on the assumption that Google's market value will exceed that of Microsoft in 2 years. Google's expected return is 1.25 times of that of Microsoft. Under this assumption, answer the following questions. (a) Currently Microsoft is traded at $280 per share, with last quarter's earnings of $9.70 per share. Suppose Microsoft pays out 25% of its earning as dividend, and its quarterly earnings growth rate is 3%, what are the expected returns for each company? (b) Microsoft has 7.5 billion shares outstanding. Before earning announcement, investors were expecting Google to have the same total earning (who has 13 billion shares outstanding) in 2 years as that of Microsoft at that time. What was the market expecting for Google's earning on July 27? Was Google's stock price higher than $116 on July 27 before closing? (c) If Google has decided to pay out 10% of its earnings starting next quarter for the next 2 years. Since the retained earnings drop, the growth rate will reduce to 4.6% per quarter. After that Google will pay out 20% of its earnings as dividends. Consequently, earning growth will further slow down to 3.9% per quarter forever. What should be the dividend next quarter and dividends in the first quarter in year 2 (in the 9th quarter)? (d) What should be Google's stock price, if they adopt the dividend policy? [hint: although we have different assumptions, the expected returns remain the same] Is Google undervalued? After the market closed on July 27, Google announced earnings of $5.2 per share in the last quarter. As a result, Google's stock price closed at $116 on July 28. Currently Google's quarterly earnings growth is 5.2%. Apparently, investors are bidding up the price on the assumption that Google's market value will exceed that of Microsoft in 2 years. Google's expected return is 1.25 times of that of Microsoft. Under this assumption, answer the following questions. (a) Currently Microsoft is traded at $280 per share, with last quarter's earnings of $9.70 per share. Suppose Microsoft pays out 25% of its earning as dividend, and its quarterly earnings growth rate is 3%, what are the expected returns for each company? (b) Microsoft has 7.5 billion shares outstanding. Before earning announcement, investors were expecting Google to have the same total earning (who has 13 billion shares outstanding) in 2 years as that of Microsoft at that time. What was the market expecting for Google's earning on July 27? Was Google's stock price higher than $116 on July 27 before closing? (c) If Google has decided to pay out 10% of its earnings starting next quarter for the next 2 years. Since the retained earnings drop, the growth rate will reduce to 4.6% per quarter. After that Google will pay out 20% of its earnings as dividends. Consequently, earning growth will further slow down to 3.9% per quarter forever. What should be the dividend next quarter and dividends in the first quarter in year 2 (in the 9th quarter)? (d) What should be Google's stock price, if they adopt the dividend policy? [hint: although we have different assumptions, the expected returns remain the same] Is Google undervalued?

Answer rating: 100% (QA)

To answer the questions lets calculate the expected returns and other relevant values based on the given information a Expected Returns for Google and ... View the full answer