In April 2011, PepsiCo. traded at $67.00 per share with a forward P/E of 15.0. Analysts were forecasting per share earnings of $4.48 for year ending December 31, 2011, and $4.87 for 2012. The indicated dividend for 2011 was $1.92 per share. The street was using 9% as the required rate of return for PepsiCo. equity.
In April 2011, Coke also traded at $67 with a forward P/E of 17.3. Analysts were forecasting a $3.87 in earnings per share for year ending December 31, 2011; and $4.20 for 2012. The indicated dividend per share was $1.88. The equity is considered to have the same required return as PepsiCo.
1. Value both firms with a forecast that abnormal earnings growth (AEG) will continue after 2012 at the same level as in 2012.
2. Now value the two firms with a forecast that abnormal earnings (AEG) will grow at the GDP growth rate of 4% per year after 2012.
3. Given that you accept the analyst's forecasts for 2011 and 2012, is the market at $67 per share forecasting a long term growth rate foe AEG that is higher or lower than the 4% percent rate.
4. Calculate the PEG ratio for both of the firms. What do you make of this ratio?