Reference no: EM13510225

At year-end 1991, the Wall Street consensus was that Philip Morris's earnings and dividends would grow at 20% for five years, after which growth would fall to a marketlike 7%. Analysts also projected a required rate of return of 10% for the U.S. equity market.

a. Using the data in the accompanying table and the multistage dividend discount model, calculate the intrinsic value of Philip Morris stock at year-end 1991. Assume

a similar level of risk for Philip Morris stock as for the typical U.S. stock.

b. Using the data in the accompanying table, calculate Philip Morris's price-earnings ratio and the price-earnings ratio relative to the S&P 500 Stock Index as of December 31, 1991.

c. Using the data in the accompanying table, calculate Philip Morris's price-book ratio (i.e., ratio of market value to book value) and the price-book ratio relative to the S&P 500 Stock Index as of December 31, 1991.

Philip Morris Corporation Selected Financial Data Years Ending December 31 ($ millions except per share data)
	1991	1981
Earnings per share	$4.24	$0.66
Dividends per share	$1.91	$0.25
Stockholders' equity	12,512	3,234
Total liabilities and stockholders' equity	47,384	$9,180
Other data Philip Morris
Common shares outstanding (millions)	920	1,003
Closing price common stock	$80.250	$6.125
S&P 500 Stock Index:
Closing price	417.09	122.55
Earnings per share	16.29	15.36
Book value per share	161.08	109.43