3. beta 1.75 risk free 0.07 a. market return 0.15 expected rate of return 0.21 b. market return 0.1 expected rate of return 0.1225 9. 1st investment project P0 100000 P3 133100 PV 100000 rate of return 0 2nd investment project year cash flow discount factor PV 0.1 1 0 0 2 15000 12396.69421 3 25000 18782.87002 3 100000 75131.48009 PV 106311.0443 rate of return 0.063110443 10. P0 20 g 0.08 D1 0.6 a. Gordon model for k 0.11 11. P0 D0 EPS1 BV0 EO 28 1.2 1.6 17.32 SHC 48 1.08 3 32.21 S&P 500 1100 16 48 423.08 a. discount rate 0.11 g 0.08 Value EO 43.2 Value EO > P EO 43.2 > 28 undervaluated b. next 3 years growth beyond EO 0.12 0.08 SHC 0.13 0.07 EO 1 2 3 4 - infinity PV 1.210810811 1.221719016 1.232725494 44.37811778 Value EO 48.0433731 Value EO > P EO 48.0433731 > 28 undervaluated 13. 1991 1981 Income Statement Operating revenue 56458.00 10886.00 Cost of sales 25612.00 5253.00 Excise taxes on products 8394.00 2.58 Gross profit 22452.00 3.05 "Selling, general, and administrative expenses " 13830.00 1741.00 Operating income 8622.00 1312.00 Interest expense 1.65 232.00 Pretax earnings 6971.00 1080.00 Provision for income taxes 3044.00 420.00 Net earnings 3927.00 660.00 Earnings per share 4.24 0.66 Dividends per share 1.91 0.25 Balance Sheet Current assets 12594.00 3733.00 "Property, plant, and equipment, net" 9946.00 3583.00 Goodwill 18624.00 634.00 Other assets 6220.00 1230.00 Total assets 47384.00 9180.00 Current liabilities 11824.00 1936.00 Long-term debt 14213.00 3499.00 Deferred taxes 1803.00 455.00 Other liabilities 7032.00 56.00 Stockholders’ equity 12512.00 3234.00 Total liabilities and stockholders’ equity 47384.00 9180.00 Other Data Philip Morris: Common shares outstanding (millions) 920.00 1003.00 Closing price common stock 80.25 6.13 S&P Industrials Index: Closing price 417.09 122.55 Earnings per share 16.29 15.36 Book value per share 161.08 109.43 growth rate next 5 years growth beyond 0.20 0.07 rate of return 0.1 a. D0 1.91 1 2 3 4 5 6-infinity PV 2.083636364 2.273057851 2.479699474 2.705126699 2.951047308 105.2540207 Value 117.7465883 b. P/E 18.92688679 P/E S&P 500 25.60405157 relative P/E 0.739214524 c. BV per share 13.6 P/BV 5.900735294 P/BV S&P 500 2.589334492 relative P/BV 2.278861735 15. Current stock price 50 30 Share outstanding 10 20 Projected earnings per share 4 3.2 Projected dividend per share 0.9 1.6 projected dividend growth rate 0.08 0.07 Stock beta 1.2 1.4 Investors required rate of return 0.1 0.11 Balance sheet data Long-term debt 100 130 Stockholders equity 300 320 real GDP 0.05 S&P 500 expected 0.2 U.S. T-Bills 0.05 U.S. Treasury 0.08 a. Value LCC 45 Value AOC 40 b. R LCC 0.23 R AOC 0.23