Answered step by step
Verified Expert Solution
Question
1 Approved Answer
give the answers not just formulas In 2000, Endrun enjoyed remarkable success in the capital markets. During that year, Endrun's shares increased in value by
give the answers not just formulas
In 2000, Endrun enjoyed remarkable success in the capital markets. During that year, Endrun's shares increased in value by 90%, while the S\&P 500 index fell by 9%. At the end of 2000, Endrun's shares were trading at roughly $90 per share, and all the sell-side analysts following Endrun recommended the shares as a "buy" or a "strong buy." With 760.0 million shares outstanding, Endrun had a market capitalization of $68,400 million and was one of the largest firms (in terms of market capital) in the United States. At year-end 2000 , Endrun's book value of common shareholders' equity was $12,500 million. At year-end 2000. Endrun posted earnings per share of $1.35. Among sell-side analysts following Endrun, the consensus forecast for earnings per share was $1.50 per share for 2001 and $1.65 per share for 2002 , with 12% earnings growth expected from 2003 to 2005 . At the time, Endrun was paying dividends equivalent to roughly 45% of earnings and was expected to maintain that payout policy. At year-end 2000 , Endrun had a market beta of 1.8 . The risk-free rate of return was 4.5%, and the market risk premium was 6.0%. a. Use the CAPM to compute the required rate of return on common equity capital for Endrun. b. Use year-end 2000 data to compute the following ratios for Endrun: 1. Market-to-book 2. Price-earnings (using 2000 earnings per share) 3. forward price-earnings (using consensus forecast earnings per share for 2001) c. Reverse engineer Endrun's $90 share price to solve for the implied expected return on Endrun shares at year-end 2000 . Do the reverse engineering under the following assumptions: 1. Endrun's market price equals value. 2. The consensus analysts' earnings-per-share and earnings growth forecasts through 2005 are reliable proxies for market expectations. 3. Endrun will maintain a 45% dividend payout rate. 4. Beyond 2005, Endrun's long-run earnings growth rate will be 4.0% Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started