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
DescriptionStatistics
2008200920102010
Beta0.68
Payout Ratio0.57
Price Per Share (05/06/10 Close)$33.96
Number of Common Shares Outstanding########
ROE0.141
Dividends Paid$1,709,000,000################
Net Income$4,395,000,000################
Common Equity#############################
Calculated ROE0.250.130.14
Calculated Dividend Per Share$0.90
Part A Answerg =0.0606
Part B Answerg =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 companys 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 ing = rs (D1/ P0)
g =0.0208