Abbott Laboratories (ABT) engages in the discovery, development, manufacture, an
ID: 2613236 • Letter: A
Question
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of a line of health care and pharmaceutical products. Below you will find selected information from Value Line. Use the Value Line estimated 2009 figures as the actual year-end figures for the company. The beta reported was .80 and the risk-free rate was 3.35 percent. Assume a market risk premium of 8 percent.
The high and low share price each year were:
What is the sustainable growth rate and required return for Abbott Laboratories? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)
Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
2005 2006 2007 2008 2009 High $ 50.00 $ 49.90 $ 59.50 $ 61.10 $ 57.40 Low 37.50 39.20 48.80 45.80 41.30What is the sustainable growth rate and required return for Abbott Laboratories? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)
Sustainable growth rate % Required return % 2.Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Share price $Explanation / Answer
1) Required Rate of return for abbott Lab = Risk free rate of return + (Beta* Market Risk Premium)
= 3.35 + (0.80 *8) = 9.75 %
Sustainable growth rate for abott Lab for year 2009 = b *r [Where b is retention ratio & r is return on equity]
b = (1- Dividend payout ratio)
= (1 - 1.6/3.65) = 0.57
Note :- Dividend Payout is calculated for Year 2009.
r = 28% (Return on Sharehlder equity taken as base. Alternatively Some authors also take return on common equity.)
So, The Sustainable Growth rate = 0.57* 0.28 = 16 % Approx.
2) Value of share price of abott for the year 2010 using constant dividend growth model (P) = E (1-b)/ k-g
where E = Earning per share, b= retention ratio , k = required rate of return & g= growth rate
E =4.15, b = [1- 1.76/4.15] = 0.58 (approx), k =28% (Alternatively Some authors also take return on common equity. Further rate of return calculated through following formulaes [ Risk free rate of return + (Beta* Market Risk Premium) ] inserting figures of current year can also be taken as k) & g = 0.58 *0.21 (Return on total share capital) = 0.12 ( 12% approx)
P = 4.15*(1-0.58)/0.28-0.12 = 1.743/0.16 = $10.90 (approx)