E5.12. Sellers Wants to Buy (Medium) Mark Sellers, a hedge fund manager with Sellers Capital in Chicago, wrote a piece in the Financial Times on September 9, 2006, arguing that Home Depot, the warehouse retailer, was worth $50 per share. Home Depot traded at $34 per share at the time. Analysts were forecasting a consensus $2.98 earnings per share for fiscal year 2007 and $3.26 for 2008. A forward dividend of $0.60 per share was indicated for 2007 and $0.70 for 2008, with the dividend payout ratio maintained at the 2008 level in subsequent years. Home Depot re- ported a book value of $26,909 million for fiscal year ending January 2006, with 2,124 shares outstanding Use a required return of 10 percent per year in answering the following questions

a. Given the analysts' forecasts, what is the growth rate for residual earnings after 2008 that is implied by Mr. Sellers's $50 valuation?

b. What are the earnings-per-share growth rates for 2009 and 2010 that are implied by Mr. Sellers's $50 valuation? Real World Connection See Exercises E9.10, E11.10, E12.9, and E14.13 cn Home Depot, and Minicuses 4.1.