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Home / Questions / Valuing the Equity of a Stable-Growth Firm The Emerson Electric Company (EMR) was founded...

Valuing the Equity of a Stable-Growth Firm The Emerson Electric Company (EMR) was founded in 1890 and is located in St. Louis Missouri. The firm provides product technologies and engineering service

Valuing the Equity of a Stable-Growth Firm

The Emerson Electric Company (EMR) was founded in 1890 and is located in St. Louis Missouri. The firm provides product technologies and engineering service for industrial, commercial, and consumer markets worldwide. The firm operates in five business segments: process management, industrial automation, network power, climate technologies, and appliance and tools.

The company has a lengthy history of dividend payments and steady growth. In recent years, the firm’s dividend payout has averaged 40% of earnings. For 2007, firm earnings were estimated to be $5.69 a share, and on December 7, 2006, Emerson’s shares were trading for $86.01, which represents a price-earnings ratio of 19.276. Data for the industry, sector, Emerson, and four competitor firms are shown on the chart found after the problems.

1. Is Emerson’s current stock price reasonable in light of its sector, industry, and comparison firms?

2. Emerson’s beta coefficient is 1.27. Assuming a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Emerson’s stock using the CAPM? What rate of growth in earnings is consistent with Emerson’s policy of paying out 40% of earnings in dividends and the firm’s historical return on equity? Using your estimated growth rate, what is the value of Emerson’s shares using the Gordon growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.

Comparable Firms

Description

Market
Cap

P/E

Return on
Equity %

Dividend
Yield %

Long-Term
Debt to Equity

Price to
Book Value

Net Profit
Margin

Price to Free
Cash Flow

Sector: Industrial goods

 

16.606

14.94%

1.48%

0.87

50.471

5.40%

75.481

Industry: Industrial
equipment & components

 

15.900

18.40%

1.41%

0.649

10.11

7.90%

−134.9

Emerson Electric Co

$34.61B

19.276

23.72%

2.40%

.0494

4.257

9.54%

65.156

Parker-Hannifin Corp.

$9.81B

14.150

18.16%

1.20%

0.308

2.298

8.25%

34.392

Roper Industries Inc.

$4.44B

24.685

14.27%

0.50%

0.603

3.122

11.89%

232.735

Pentair Inc.

$3.23B

17.943

11.56%

1.70%

0.485

1.974

4.48%

147.667

Walter Industries Inc.

$2.19B

23.537

15.70%

0.30%

4.036

2.731

7.38%

Aug 12 2021 View more View Less

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