The Emerson Electric Company (EMR) was founded in 1890 and is located in St. Louis, Missouri. The

Question:

The Emerson Electric Company (EMR) was founded in 1890 and is located in St. Louis, Missouri. The firm provides product technologies and engineering services for industrial, commercial, and consumer markets worldwide. The firm operates in five business segments: process management, industrial automation, network power, climate technologies, and appliance and tools.
The company has a lengthy history of payments and steady growth. In recent years, the firm’s payout has averaged 40% of earnings. For 2007, firm earnings were estimated to be $ 5.69 a share, and on December 7, 2006, Emerson’s share was trading for $ 86.01, and has a price– earnings ratio of 19.26. Data for the industry, sector, Emerson, and four competitor firms are shown on page 300.
a. Is Emerson’s current stock price reasonable in light of its sector, industry, and comparison firms?
b. Emerson’s is 1.27. Assuming a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Emerson’s stock using the (CAPM)? What rate of growth in earnings is consistent with Emerson’s policy of paying out 40% of earnings in dividends and the firm’s historical return on equity? Using your estimated growth rate, what is the value of Emerson’s shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.
c. Based on your analysis in Problem 8-8(b), what growth rate is consistent with Emerson’s current share price of $ 86.01?
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