PROBLEM 8-8 Glven Levered equity bata Risk free rate (10 year US Treasury bond) Mano riak premium 1.27 0.0502 0.05 dates damist 2007 Dividend payout ratio Stoc (127/003 5-year growth rate estimate Return on Equity Dividend Yield Long-term Debt to Equity Price to Book Value Net Profit Margin PIE Market Cap SPILLI Description Sector Industrial Goods Industry Industrient & Components Emmon Electric Co. Parker Hannifin Corp. Roper Industries Inc Pentair Inc Water Industries Inc Price To Free Cash Flow 75.481 134.5 65.156 14.392 232.735 147.667 -10.587 1 8-8 Valuing the Equity of a Stable-Growth Firm 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, and has a price-earnings ratio of 19.26. Data for the industry, sector, Emerson, and four competitor firms are shown on page 300. 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 capital asset pricing model (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 shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model. c. Based on your analysis in Problem 8-8(b), what growth rate is consistent with Emerson's current share price of $86.01? PROBLEM 8-8 Glven Levered equity bata Risk free rate (10 year US Treasury bond) Mano riak premium 1.27 0.0502 0.05 dates damist 2007 Dividend payout ratio Stoc (127/003 5-year growth rate estimate Return on Equity Dividend Yield Long-term Debt to Equity Price to Book Value Net Profit Margin PIE Market Cap SPILLI Description Sector Industrial Goods Industry Industrient & Components Emmon Electric Co. Parker Hannifin Corp. Roper Industries Inc Pentair Inc Water Industries Inc Price To Free Cash Flow 75.481 134.5 65.156 14.392 232.735 147.667 -10.587 1 8-8 Valuing the Equity of a Stable-Growth Firm 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, and has a price-earnings ratio of 19.26. Data for the industry, sector, Emerson, and four competitor firms are shown on page 300. 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 capital asset pricing model (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 shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model. c. Based on your analysis in Problem 8-8(b), what growth rate is consistent with Emerson's current share price of $86.01