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Q 3 . United Healthcare, a health maintenance organization, is expected to have earnings growth of 3 0 % for the next five years and

Q3. 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 6.5%.)
a. Estimate the price/book value ratio for United Healthcare, given the inputs as given.
b. Estimate PB ratios given the growth rates in high growth period ranging from 10% to 50%, with a 10% incremental interval.
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?

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