Consider the information below for coffee giants Staurbucks and Tim Hortons. The data corresponds to closing prices on 10/28/2011. Assume that rf = 0.01, E[rM]=0.08. The tables contain the following information: Range: minimum-maximum transanction prices on that date. 52 week: minimum-maximum transanction prices during last year. Vol/Avg.: Trading volume on that date and average trading volume Mkt cap: Mearket capitalization P/E: Price-Earnings ratio P0/E0 Div/yield: Dividend per quarter and yield per year (%). D0 = Div 4, Yield per year = D0/P0 EPS: Earnings per share per year (E0) Shares: Number of outstanding shares Inst. own: Fraction of shares owned by institutions.

Questions Use the DDM you know to answer the following questions 1. What are the required rates of return on equity? 1 Figure 1: Starbucks vs Tim Hortons 2. Find SBUX and THI plowback ratios 3. What ROE values are implicit in prices for SBUX and THI? 4. What is the NPVGO for SBUX and THI? 5. What would happen to the P/E1 ratio if SBUXs CEO decides to retain less earnings? 6. What would happen to the P/E1 ratio if THIs CEO decides to retain less earnings? 7. What would be SBUXs price if today it is announced that b=0.5 forever? 8. After lots of research you conclude that the market is wrong about these companies growth prospects. You believe that SBUX growth rate will be 5% hereafter. What is then SBUXs intrinsic value? 9. You estimate that THI will generate annual dividends equal to $1, $0.8 and $0.7 over the following three years, and will then grow at %5 forever. What is then THIs intrinsic values? 10. Based on your calculations, design a trading strategy to profit from the current situation (would you buy/sell any stock?)

Hints One way to find the plowback ratio is using the relationship D0 = (1 b)E0. Then b = 1 D0/E0.