Stock Valuation and P/E Ratio The research analyst at Needham & Company believes that Life Point Hospital Corp. has a return on equity (ROE) of 9% with a beta (beta) of 1.25.
Life Point Hospital Corp plans to maintain indefinitely its plowback ratio of 0.67. The firm's earnings this year (E_0) were equal to $3 per share.
The research analyst estimates that the expected return this year for the market E(r_m) will equal 14% and T-bills will offer a 6% return (r_f = 6%).
Find the price at which Life Point Hospital Corp should sell.
Calculate the P/E ratio of Life Point Hospital Corp. Calculate the present value of growth opportunities.
Assume that your answer in Part (a) is the intrinsic value of the stock.
Suppose your research convinces you that Life Point Hospital will announce within a few days that it will immediately reduce its plowback ratio to 1/3.
If you're a current stockholder in Life Point Hospital should you purchase more stock or sell your position?