Thomas Weeramantry and Franoise Delacour are co-managers of a US-based diversified global equity portfolio. They are researching

Question:

Thomas Weeramantry and Françoise Delacour are co-managers of a US-based diversified global equity portfolio. They are researching Microsoft Corporation (NASDAQ-GS:

MSFT),5 the largest US-headquartered technology sector company. Weeramantry gathered a number of research reports on MSFT and began his analysis of the company in May 2013, when the current price for MSFT was $$33.31$. In one research report, the analyst offered the following facts, opinions, and estimates concerning MSFT:

• The most recent quarterly dividend was $$0.23$ per share. Over the coming year, two more quarterly dividends of $$0.23$ are expected, followed by two quarterly dividends of $$0.25$ per share.

• MSFT’s required return on equity is 7.0 percent.

• A one-year target price for MSFT is $$37.50$.

An analyst’s target price is the price at which the analyst believes the security should sell at a stated future point in time. Based only on the information given, answer the following questions concerning MSFT. For both questions, ignore returns from reinvesting the quarterly dividends.

i. What is the analyst’s one-year expected return?

ii. What is a target price that is most consistent with MSFT being fairly valued?

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