You have the following information for apollo inc investors...

You have the following information for Apollo Inc.: Investors’ required rate of return for Apollo and similar firms is 12%. Earnings per share (EPS) for Apollo last year was $4.00. Apollo follows a policy of retaining 30% of its earnings. You estimate that the Apollo’s return on reinvested funds is 15%. The shares of firms comparable to Apollo sell at P/E multiples of 13.33x EPS. a) Using the P/E multiple approach, calculate Apollo’s stock price. (3 points) b) Using the constant growth dividend model, calculate Apollo’s stock price. (4 points) c) If you believe that the markets will most accurately price Apollo, which of the two estimates above would you weight more heavily and why? (3 points)

Transcript

00:01 Okay, so i see that you need help with this question.

00:02 It says a particular company currently has sales of 250 million.

00:11 Sales are expected to grow by 20, grow by 20.

00:22 A, find the stock's intrinsic value.

00:29 It's just a fixed, it's justified price.

00:32 So to calculate the sales for year one and year two, sales, so you would do, okay, grow by 20%.

00:42 That's what that said.

00:44 So $250 million times 1 .2 is $300 million.

00:52 Then year two is 300 times 1 .1, and that's $3 .30 million.

01:02 Calculate the net profit this is sales for year one and two then you're going to calculate the net profit for sales for year one and year two so that is 300 times 0 .08 and that's 24 million million.

01:28 Year two, you're going to do 330 times 0 .08, and that is 26 .4 million.

01:42 Let me just put a dollar sign so we know that we're talking about money.

01:46 Then you're going to calculate the dividends for year one and two.

01:49 So the dividends for year one is 24 times 0 .56, and that's 13 .44 million.

02:02 Then for year two it's 26 .4 times 0 .56 and that's 14 .784 million.

02:17 Okay then you're going to calculate the dividends per share for year one and two.

02:32 So that would be for year one, 13 .44 divided by 13 .74, and that is 0 .9776.

02:45 In year two, 14 .784 divided by 13 .74.

02:54 That's 1 .0758 per share, per share, per share.

03:06 Then you're going to calculate the earnings per share for year one and two.

03:19 So for year one, it's 24 divided by 13 .74 and that is equal to $1 .746 per share.

03:37 Year two is 26 .4 divided by 13 .74 for...

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