Now calculate the intrinsic value of three of the firms you selected in the previous question.

Make reasonable judgments about the market risk premium and the risk-free rate.

a. What is the required return on each firm based on the CAPM? You can find the beta of each firm from its Statistics page.

b. Try using a two-stage growth model, making reasonable assumptions about how future growth rates will differ from current growth rates. Compare the intrinsic values derived from the two-stage model to the intrinsic values you find assuming a constant-growth rate.

Which estimate seems more reasonable for each firm?

previous question.

Choose 10 firms that interest you and download their financial statements from any of these Web sites: finance.yahoo.com, finance.google.com, or money.msn.com.

a. For each firm, find the return on equity (ROE), the number of shares outstanding, the dividends per share, and the net income. Record them in a spreadsheet.

b. Calculate the total amount of dividends paid (Dividends per share × Number of shares outstanding), the dividend payout ratio (Total dividends paid/Net income), and the plowback ratio (1 − Dividend payout ratio).

c. Compute the sustainable growth rate, g = b × ROE, where b equals the plowback ratio.

d. Plot the P/E ratios of the firms against the growth rates in a scatter diagram. Is there a relationship between the two?

e. Plot the price-to-book ratios against the price-earnings ratio for your sample of firms. Are the two variables correlated? What about price-to-sales versus price-earnings?

f. For each firm, compare the 3-year growth rate of earnings per share with the growth rate you calculated above. Is the actual rate of earnings growth correlated with the sustainable growth rate you calculated?