Question: Sellers Wants to Buy (Medium) Mark Sellers, a hedge fund manager with Sellers Capital in Chicago, wrote a piece in the Financial Times on September 9, 2006, arguing that Home Depot, the warehouse retailer, was worth $50 per share. Home Depot traded at $34 per share at the time. Analysts were forecasting a consensus $2.98 earnings per share for fiscal year 2007 and $3.26 for 2008. A forward dividend of $0.60 per share was indicated for 2007 and $0. 70 for 2008, with the dividend payout ratio maintained at the 2008 level in subsequent years. Home Depot reported a book value of $26,909 million for fiscal year ending January 2006, with 2, 124 shares outstanding. Use a required return of 10 percent per year in answering the following questions:
a. Given the analysts forecasts, what is the growth rate for residual earnings after 2008 that is implied by Mr. Sellers $50 valuation?
b. What are the earnings-per-share growth rates for 2009 and 2010 that are implied by Mr. Sellers $50 valuation?