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Abbot Labortories

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Abbott Laboratories Problem

Quanisha Duckworth

Bus405: Principles of Investment

Instructor: Mark Stricklett

December 1, 2014

27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model.

Beta = .60
Risk free rate = 3.13%
Market risk premium = 7%
Dividend declared per share = $1.60
2009 EPS = $3.65
2009 ROE = 28.00%

Beta b = 1 – ($1.60 / $3.65) = .5616
Growth g = 28% × .5616 = 15.73%
Risk adj. discount rate k = 3.13% + 0.60(7%) = 7.33%
Present Value of divided stream P0 = $1.60(1 + .1573)2 / (.0733 – .1573) = ($25.52) I am really not capable of using the dividend growth model for my calculation since the required returned of $25.52 is lesser than the growth rate of 15.73. So, I squared the growth rate since the 2009 dividend is being used to see what the 2010 price of stock. 28. Using the P/E, P/CF, and P/S ratios, estimates the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios. Average P/E CF P/S
5 yr avg. price ratio $17.08 $12.24 2.912

Current value per share $3.65 $ 4.95 $19.70

Growth rate 10.16% 9.82% 8.17%

Expected stock price $68.68 $66.53 $62.06

Calculation of 17.08(1.1016)($3.65) 12.24(1.0982)($4.95)...

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