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1. Constant Perpetual Growth Model Locate the information for American Electric Power (AEP). If you follow the "Financial Hlts" link you will find the current stock price, most recent dividend, and the five-year growth rate for dividends. Assuming the five-year dividend growth rate is equal to the perpetual growth rate, what is the implied required return for AEP shareholders? Does this number make sense?
2. Sustainable Growth What is the sustainable growth rate for AutoZone (AZO)? Under "Excel Analytics" you will find a link for annual ratios. This report shows return on equity and the payout ratio. Calculate the sustainable growth rate for AutoZone each year for the past five years. Is the sustainable growth rate the same every year? Why or why not?
3. Price Ratio Analysis Locate the information for Walgreen Co. (WAG). All of the information used in this problem is found under "Excel Analytics." Use the "Mthly. Adj. Prices" link and find the year-end stock price for Walgreen Co. for all available years. Next, find the earnings per share for the last five years using EPS Basic from Operations. Locate the balance sheet for each of the past five years and record the Common Equity and Common Shares Outstanding. Use the Annual Cash Flow Statement to find the Net Cash Flow from Operating Activities. Divide both common equity and cash flow by the shares outstanding each year to find the annual book value per share and cash flow per share. Record these numbers. Calculate the price-earnings ratio, price-cash flow ratio, and price-book value ratio for each year. Using this information, compute the expected share price for Walgreen Co. at the end of the next year using price ratio analysis.