United Healthcare, a health maintenance organization, is expected to have earnings growth of 30% for the next
Question:
United Healthcare, a health maintenance organization, is expected to have earnings growth of 30% for the next five years and 6% after that.
The dividend payout ratio will be only 10% during the high growth phase, but will increase to 60% in steady state. The stock has a beta of 1.65 currently, but the beta is expected to drop to 1.10 in steady state.
(The Treasury bond rate is 7.25%.)
a. Estimate the price–book value ratio for United Healthcare, given the inputs as given.
b. How sensitive is the price–book value ratio to estimates of growth during the high growth period?
c. United Healthcare trades at a price–book value ratio of 7.00. How long would extraordinary growth have to last (at a 30% annual rate) to justify this PBV ratio?
Step by Step Answer:
Investment Valuation Tools And Techniques For Determining The Value Of Any Asset
ISBN: 9781118011522
3rd Edition
Authors: Aswath Damodaran