The Emerson Electric Company (EMR) was founded in 1890 and is located in St Louis, Missouri. The firm provides product technologies and engineering services for industrial, commercial, and consumer markets worldwide. The firm operates in five business segments: process management, industrial automation, network power, climate technologies, and appliance and tools.

The company has a lengthy history of dividend payments and steady growth. In recent years, the firm's dividend payout has averaged 40% of earnings. For 2007, firm earnings were estimated to be $5.69 a share, and on December 7, 2006, Emerson's shares were trading for $86.01, which represents a price-earnings ratio of 19.276. Data for the industry, sector, Emerson, and four competitor firms are shown on page 297.

a) Is Emerson's current stock price reasonable in light of its sector, industry, and comparison firms?

b) Emerson's beta coefficient is 1.27. Assuming a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Emerson's stock using the CAPM? What rate of growth in earnings is consistent with Emerson's policy of paying out 40% of earnings in dividends and the firm's historical return on equity? Using your estimated growth rate, what is the value of Emerson's share using the Gordan (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.

c) Using your analysis in part b above, what growth rate is consistent with Emerson's current share price of $86.01?The Emerson Electric Company (EMR) was founded in 1890 and is located in St Louis, Missouri. The firm provides product technologies and engineering services for industrial, commercial, and consumer markets worldwide. The firm operates in five business segments: process management, industrial automation, network power, climate technologies, and appliance and tools. The company has a lengthy history of dividend payments and steady growth. In recent years, the firm's dividend payout has averaged 40% of earnings. For 2007, firm earnings were estimated to be $5.69 a share, and on December 7, 2006, Emerson's shares were trading for $86.01, which represents a price-earnings ratio of 19.276. Data for the industry, sector, Emerson, and four competitor firms are shown on page 297. a) Is Emerson's current stock price reasonable in light of its sector, industry, and comparison firms? b) Emerson's beta coefficient is 1.27. Assuming a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Emerson's stock using the CAPM? What rate of growth in earnings is consistent with Emerson's policy of paying out 40% of earnings in dividends and the firm's historical return on equity? Using your estimated growth rate, what is the value of Emerson's share using the Gordan (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model. c) Using your analysis in part b above, what growth rate is consistent with Emerson's current share price of $86.01

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PROBLEM 8-8 Given Levered equity beta Risk free rate (10 year US Treasury bond Market risk premium Estimated earnings for 2007 Dividend payout ratio Stock price (12/07/06) 5-year growth rate estimate 1.27 5.02% 5.00% $ $ 5.69 0.0264620393 dates 40.00% 86.01 10.00% Description Market Cap Sector: Industrial Goods Industry: Industrial Equipment & Components Emerson Electric Co. $34.61B Parker-Hannifin Corp. 9.81B Roper Industries Inc. 4.44B Pentair Inc. 3.23B Walter Industries Inc. 2.19B P/E 16.606 15.900 19.276 14.150 24.685 17.943 23.537 Given Long-term Debt to Price to Book Equity Value 0.87 50.471 0.649 10.11 0.494 4.257 0.308 2.298 0.603 3.122 0.485 1.974 4.036 2.731 Net Profit Price To Free Margin Cash Flow 5.40% 75.481 7.90% -134.900 9.54% 65.156 8.25% 34.392 11.89% 232.735 4.48% 147.667 7.38% -10.682 = Value given in problem Emerson Comparison to Industry = Formula/Calculation/Analysis required P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price Impute growth rate Dividend Yield % 1.48% 1.41% 2.40% 1.20% 0.50% 1.70% 0.30% Solution Legend a. c. Imputed growth rate Return on Equity % 14.94% 18.40% 23.72% 18.16% 14.27% 11.56% 15.70% using projected dividends using historical dividend yields