Finance 3050 Homework #2 Autumn 2012

Due Thursday 11/29/12 15 points

I. Visit the website http://finance.yahoo.com and gather the following information for

Questar (ticker symbol: STR):

1. The closing price for Questar’s common stock on Tuesday 11/20/12

2. Questar’s annual dividend, projected for next year

3. The current analysts’ average estimate for Questar’s EPS for this year (Dec. ‘12)

4. The current analysts’ average estimate for next year’s EPS (Dec. ‘13)

5. The current analysts’ average estimate of Questar’s 5-yr EPS growth

II. Calculate:

a. Based on the following given information, what rate of return should Questar’s

shareholders require on their investment?

E(rm) = 8.5% Rf = 1.0% Questar’s beta = .44

b. If Questar retains 44% of its earnings, and can earn a return of 3% on reinvested funds, at

what rate can dividends grow indefinitely?

c. Based on your answer to (a) and information obtained in part I, if Questar’s dividend

(Part I, item 2) is expected to grow indefinitely at the rate found in part (b), what is a

share of Questar stock worth today? (Assume that the dividend you found in part I is D0 )

d. By how much is Questar stock overpriced or underpriced when comparing your answer to

part (c) with the current price (part I, item 1)?

e. If Questar’s earnings grow at the estimated growth rate for 5 years (item I, part 5), what

will EPS be at the end of 2017 (begin with the EPS estimate for ‘12 [part 1, item 3])?

f. Using your answer to (f), and assuming that Questar’s P/E ratio is 16.1 at the end of

2017, what should a share of stock sell for at that time?

g. Assume that dividends will not grow for the next 5 years. If you buy a share of Questar

stock at the current price (part I, item 1), receive the current dividend (part I, item 2) for

each of the next 5 years, then sell the stock for the price found in (g), what will be your

dollar-weighted average annual rate of return (Calculate IRR using P0, D1-D5 and P5)?