United Healthcare 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 7.25%, and the market risk premium is 5.5%. You will want to use a spreadsheet to answer the following.

a. Using a two-stage model, estimate the price-to-book value ratio for United Healthcare, based on fundamentals. Hint: Your PBV should be between 5 and 6.

b. How sensitive is the price-to-book value ratio to estimates of growth during the stable growth period? Re-estimate PBV for g = 0% to 10% in 1% increments and produce a table and graph summarizing results.

c. Note that the two-stage model uses the high-growth ROE throughout. This is because the stable growth ROE is implicitly determined by the stable payout ratio and stable growth rate that we have specified. What is the implicit stable-growth ROE that is being assumed?

d. 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?