Use data from the Standard & Poor's Market Insight Database at www.mhhe.com/edumarketinsight to answer the following questions.

1. Click on the Market Insight Company tab, then the Population tab, and scroll through the list to find 10 firms that interest you. Click on a firm's name and its symbol will automatically be entered. Click on Go, then on the Financial Highlights link in the Compustat Reports section.
1. For each firm, find the return on equity (ROE), the number of shares outstanding, the dividends per share, and the net income. Record them in a spreadsheet.
2. Calculate the total amount of dividends paid (dividends per share × number of shares outstanding), the dividend payout ratio (total dividends paid / net income), and the plowback ratio (1 – dividend payout ratio).
3. Compute the sustainable growth rate, g = b × ROE, where b equals the plowback ratio.
4. Compare the growth rates (g) with the P/E ratios of the firms by plotting the P/Es against the growth rates in a scatter diagram. Is there a relationship between the two?
5. Find the price-to-book, price-to-sales, and price-to-cash flow ratios for your sample of firms. Use a line chart to plot these three ratios on the same set of axes. What relationships do you see among the three series?
6. For each firm, compare the 5-year growth rate of earnings per share with the growth rate you calculated above. Is the actual rate of earnings growth correlated with the sustainable growth rate you calculated?
2. Use the data from Market Insight to estimate the intrinsic values of three firms from your sample. Use the firms' betas from the S&P Stock Report section. Make reasonable judgments about the market risk premium and the risk-free rate or find estimates in the Internet.
1. What is the required return on each firm based on the CAPM?
2. Look in the Valuation Data section of the Excel Analytics menu. Find the forecasted price for next year. Use the forecasted price, information about dividends (collected in the previous problem), and the CAPM required return to calculate the intrinsic value of the stock today. How does this compare to the stock's current market price?
3. Try using a two-stage growth model, making reasonable assumptions about how future growth rates will differ from current growth rates for the firms. Compare the intrinsic values derived from the two-stage model to the intrinsic values you found assuming a constant growth rate. Which estimate seems more reasonable for each firm?
3. On the Market Insight home page, click on the Industry tab and select the Restaurants category. In the Compustat Reports section, click on the Constituents link to get a list of companies in this industry. Choose 5 of the firms listed and follow the links to get to the Financial Highlights for each firm.
1. Perform a "Valuation by Comparables" analysis by looking at the Price/Earnings, Price/Book Value, Price/Sales, and Price/Cash Flow ratios of the firms relative to each other and to the industry average. Which of the firms seem to be overvalued? Which seem to be undervalued? Can you think of reasons for any apparent mispricings?
2. Calculate the firms' dividend payout ratios (total dividends paid / net income) and their sustainable growth rates (g = b X ROE). What impact does the growth rate seem to have on firm value?