Abbott Laboratories Problem

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Abbott Laboratories Problem February 3, 2014 Abbott Laboratories After reading the Value Lines figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete the following Problems: Problem 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. The dividend = 1.60 for 2009. The growth rate is calculated as follows: 1-(1.6/3.65) = .5616 g=28%*.5616 = 15.72% Discount rate: k=3.13%+-.60(7%) = 7.33% 2010 share price: Po = 1.6(1.15)/.07-.15 = $26.14 share price Problem 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. Average Stock Price & P/E Ratio: Year 2005 2006 2007 2008 2009 Avg Stock $ 43.75 44.55 54.15 53.45 49.35 P/E Ratio /2.5 /2.52 /2.84 /3.03 /3.65 = 17.5 17.68 19.07 17.64 13.52 Average P/E Ratio = 17.5+17.68+19.07+17.64+13.52/5 = 17.08 EPS growth rate: 0.8%, 12.7%, 6.69%, 20.46%. Average EPS growth: 10.16% P/E price: 17.08(1.1016)(3.65) = $68.68 Average P/CF: 12.24 CF growth rate: 2.63%, 15.38%, 6.67%, 14.58%. Average CF growth rate: 9.82% P/CF price 12,24(1.0982)(4.95) = $66.53 Average P/S: 2.912 SPS growth rates: 0.76%, 14.36%, 16.03%, 1.55% Average SPS growth rate: 8.17% P/S price: 2.912(1.0817)(19.70) = $62.06 Problem 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. EPS next year: 3.65(1.1572) = $4.22 Book value: 12.95(1.1572) = $14.99

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