The MEDCOM firm is currently selling for €32, with trailing 12-month earnings and dividends of €1.23 and €0.64, respectively. The Price to Earnings ratio (P/E) is 26, the Price to Book Value ratio (P/BV) is 6.5 and the Price to Sales ratio (P/S) is 2.8. The return on equity is 27 percent and the profit margin on sales is 11 percent. The Treasury bond rate is 4.5 percent, the equity risk premium is 6 percent and MEDCOM’s beta is 1.3.

- Calculate the MEDCOM’s required return, based on the Capital Asset Pricing Model.
- Assume that the dividend and earnings growth rates are 9.5%. Calculate the P/E, P/BV and P/S ratios that would be justified given the required rate of return in i) and current values of the dividend payout ratio, ROE and profit margin.

- Given that the assumptions of the constant growth model are appropriate, state whether MEDCOM is fairly priced, overpriced, or underpriced.

Answer rating: 100% (QA)

Answer Given that EPS 123 DPS 064 3D PIE 26 3D PIB 65 Pls 28 RO E 27 iste fsee ... View the full answer