1) Problem 8-7 (pg 298 ) This problem has two payout ratios (48% & 40%)

June 12, 2016

Question
1) Problem 8-7 (pg 298 ) This problem has two payout ratios (48% & 40%) use 40% given in part b)
High-Growth or Stable-Growth Firm? Intel Corporation is a leading manufacturer of semiconductor chips. The
firm was incorporated in 1968 in Santa Clara, California, and represents one of the greatest success stories of
the computer age. Although Intel continues to grow, the industry in which it operates has matured, so there is
some questions whether the firm sho9uuld be evaluated as a high-growth company or stable-growth company
from now on. For example, in December 2007, the firms shares were trading for \$20.88, which represented a
price-earnings ratio of only 17.61. compared to Google Incs price-earnings ratio of 53.71 on the same date, it
would appear that the decision has already been made by the market. Intels expected earnings for 2007 were
\$1.13 per share, and its payout ratio was 48%. Furthermore, selected financial data for the sector, industry,
and seven of the largest firms (including Intel) are found in Exhibit 8.7.1 (attached)
a. Is Intels current stock price of \$20.88 reasonable in light of its sector, industry, and comparison firms?
b. Intel has a beta coefficient equal to 1.66. If we assume 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 Intels stock using the CAPM?
What rate of growth in earning is consistent with Intels policy of paying out 40% of earnings in
dividends and the firms historical return on equity? Using your estimated growth rate, what is the
volume of Intels shares using the Gordon (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 Intels current share price of
\$20.88?
d. Analysts expect Intels earnings to grow at a rate of 12% per year over the next five years. What rate of
growth from Year 6 forward (forever) is needed to warrant Intels current stock price (use your CAPM
estimate of the required rate of return on equity)? (Hint: Use a two-stage growth model where Intels
earnings grow for five years at 12% and from Year 6 forward at a constant rate)