After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit your work to your instructor. Show your calculations and in your response to

 

Problem 31 write a 100- to 200-word defense of your position as to the value of Abbott Laboratories stock at its current price of $50 per share.
27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model.

 

Sustainable Growth Rate = Return on Equity (ROE) x Retention Ratio

 

Sustainable Growth Rate	=	ROE	X	Retention ratio
Sustainable Growth Rate	=	Net Income/Equity	X	1 - (Dividend Payout/EPS)
Sustainable Growth Rate	=	6400/22950	X	1-(1.76/4.15)
0.160600572	=	0.278867102	X	0.575903614

 

The sustainable growth rate is .16 or 16% for Abbott Laboratories.

 

Required Rate of Return = Risk-free rate + (market rate of return – risk-free rate) x Beta

 

Required Rate of Return	=	Risk-free rate	+	(Market Rate of Return - risk free rate) x beta
Required Rate of Return	=	3.13	+	(.07 - 3.13) x .60
1.294	=	3.13	+	(.07 - 3.13) x .60

 

The required rate of return is 1.30 for Abbott Laboratories.

 

 

28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios.

 

P/E ratio = Current stock price / current annual earnings per share

 

P/E Ratio	=	Current Stock Price	/	EPS
12.04819277	=	$50	/	4.15

 

 

P/CF ratio = Current stock price / current annual cash flow per share

 

P/FC Ratio	=	Current Stock Price	/	Cash-flow per share
9.090909091	=	$50	/	5.5

P/S ratio = Current stock price / current annual sales revenue per share

 

P/S Ratio	=	Current Stock Price	/	Sales revenue per share
2.331002331	=	$50	/	21.45

 

 

29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model.

 

Clean Surplus Relationship (CSR) = Earnings per share – dividends = change in book value per share

30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not?

Clean Surplus Relationship (CSR) = Earnings per share – dividends = change in book value per share

 

31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell?