General Electric (NYSE: GE) is currently selling for $38.50, with trailing 12-month earnings and dividends of $1.36 and $0.64, respectively. PIE is 28.3, P/B is 7.1, and PIS is 2.9. The return on equity is 27.0 percent, and the profit margin on sales is 10.9 percent. The Treasury bond rate is 4.9 percent, the equity risk premium is 5.5 percent, and GE"s beta is 1.2.

A. What is GE"s required rate of return, based on the capital asset pricing model?

B. Assume that the dividend and earnings growth rates are 9 percent. What PIES, PBS, and PISs would be justified given the required rate of return in Part A and current values of the dividend payout ratio, ROE, and profit margin?

C. Given that the assumptions and constant growth model are appropriate, state whether GE appears to be fairly valued, overvalued, or undervalued based on fundamentals.

Answer rating: 100% (QA)

AThe required rate of return based on the capital asset pricing model is 114 The required rate of re... View the full answer