ExxonMobil Corporation is a petroleum and petrochemicals company. It primarily engages in the exploration, production, and sale of crude oil and natural gas and the manufacture, transportation, and sale of petroleum and petrochemical products. The company operates in approximately two hundred countries worldwide, in North America, Europe, Asia-Pacific, Africa, South America, the Middle East, and the Caspian area. During Years 2 to 4, ExxonMobil generated the following total dividends to common equity shareholders (amounts in millions):

Analysts project 10 percent growth in earnings over the next five years. Assuming concurrent 10 percent growth in dividends, the following table provides the amounts analysts project for total dividends for ExxonMobil for each of the next five years. In Year +6, we project total dividends for ExxonMobil assuming that ExxonMobil's income statement and balance sheet will grow at a long-term growth rate of 3 percent.

At the beginning of Year +1, ExxonMobil had a market beta of 0.71. At that time, intermediate term U.S. Treasuries were yielding roughly 4.0 percent. Assume that the market requires a 7.0 percent risk premium. ExxonMobil has 6,310 million shares outstanding at the beginning of Year +1 and trades at a share price of $51.
Required
a. Calculate the required rate of return on equity for ExxonMobil as of the beginning of Year +1.
b. Calculate the sum of the present value of total dividends for Year -I-1 through +5.
c. Calculate the continuing value of ExxonMobil at the start of Year +6 using the perpetuity with-growth model with Year +6 total dividends. Also compute the present value as of the beginning of Year +1.
d. Compute the total present value of dividends for ExxonMobil as of the beginning of Year +1. Remember to adjust the present value for midyear discounting.
e. Compute the value per share of ExxonMobil as of the beginning of Year +1.
f. Given the share price at the start of Year +1, do ExxonMobil shares appear under-priced, overpriced, or correctly priced?

Transcribed Image Text:

Year 2 Year 3 Year 4 Common Dividend Payments. . . 6,836 4,660 5,694 9,206 $12,639 $16,317 Total Dividends Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 Projected Growth Projected Total 1090 10% 10% 10% 10% 3% Dividends to Common Equity $17,949 $19,744 $21,718 $23,890 $26,279 $27,067