| Internet Research Results |
| Check the Cash Flow Statement for Dividends Paid |
| Result: dividends were paid in 2008, 2009 and 2010 or 3 consecutive years |
| Under “Company”, click on “Key Statistics”. Find a) beta and b) Dividend Payout Ratio |
| Result: |
| Beta = | 0.68 |
| Payout = | 0.57 |
| Calculations: Part A |
| Calculate the expected growth rate of UPC using the CAPM. |
| g=Plowback Ratio * ROE |
| Payout = | 0.57 |
| ROE = | 0.14 |
| g = | 0.0606 |
| UPS Statistics as of 12/31/2010 |
| Description | | | Statistics |
| | | | 2008 | 2009 | 2010 | 2010 |
| Beta | | | | | | 0.68 |
| Payout Ratio | | | | | 0.57 |
| Price Per Share (05/06/10 Close) | | | | | $33.96 |
| Number of Common Shares Outstanding | | | | | 1,690,000,000 |
| ROE | | | | | 0.141 |
| Dividends Paid | | | $1,709,000,000 | $1,521,000,000 | $1,525,000,000 |
| Net Income | | | $4,395,000,000 | $2,260,000,000 | $2,661,000,000 |
| Common Equity | | | $17,714,000,000 | $17,777,000,000 | $19,393,000,000 |
| Calculated ROE | | | 0.25 | 0.13 | 0.14 |
| Calculated Dividend Per Share | | | | | $0.90 |
| | | | | Part A Answer | g = | 0.0606 |
| | | | | Part B Answer | g = | 0.0208 |
| Calculations: Part B |
| Calculate the expected growth rate using the Constant Growth (or Gordon Growth) Model. |
| For a constant growth stock: D1 = D0(1 + g), D2 = D1(1 + g) = D0(1 + g)2, and so on. |
| D0 = Current Dividend in dollars (per share) |
| D1 = the next expected dividend or assumed to be paid 1 year from now |
| D1= D0(1+g); | g is equal to "g" in Part A |
| D1= | 0.9571 |
| P0=D1/(rs-g) | ***Note: g is a new "g" different from the one in Part A |
| P0 = Current Stock Price |
| g = rs – (D1/ P0) |
| rs = Required Rate of Return |
| rs = rf + b(rM – rf) |
| rf = risk-free interest rate (or RRF); use 1% or interest rate on a three-month U.S. Treasury Bill is a good measure |
| rf = | 0.0100 |
| b = beta (use your company’s beta) |
| rM = expected return on the market |
| (rM – rf) =Market Risk Premium; assume 5.5% = | | | | 0.0550 |
| Therefore, rM = | 0.0650 |
| rs = | 0.0474 |
| Calcalut g in | g = rs – (D1/ P0) |
| g = | 0.0208 |
ruslando30
capitalplaning.xlsx
