CFA Examination Level II Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies: Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). AOC also has a June 30 fiscal year end. You have compiled the data in Table 7 for this purpose. Use a one-year time horizon and assume the following: Real gross domestic product is expected to rise 5 percent;S&P Industrials expected total return of 20 percent;U.S. Treasury bills yield 5 percent;and 30-year U.S. Treasury bonds yield 8 percent. a. Calculate the value of the common stock of LCC and AOC using the constant-growth dividend discount model. Show your work. PHILIP MORRIS CORPORATION: SELECTED FINANCIAL STATEMENT AND OTHER DATA?YEARS ENDING DECEMBER 31 ($ MILLIONS EXCEPT PER-SHARE DATA) PHILIP MORRIS CORPORATION: SELECTED FINANCIAL STATEMENT AND OTHER DATA?YEARS ENDING DECEMBER 31 ($ MILLIONS EXCEPT PER-SHARE DATA) PHILIP MORRIS CORPORATION: SELECTED FINANCIAL STATEMENT AND OTHER DATA?YEARS ENDING DECEMBER 31 ($ MILLIONS EXCEPT PER-SHARE DATA) 1991 1981 Income Statement Income Statement Income Statement Operating revenue $56,458 $10,886 Cost of sales 25,612 5,253 Excise taxes on products 8,394 2,580 Gross profit $22,452 $3,053 Selling, general, and administrative expenses 13,830 1,741 Operating income $8,622 $1,312 Interest expense 1,651 232 Pretax earnings $6,971 $1,080 Provision for income taxes 3,044 420 Net earnings $3,927 $660 Earnings per share $4.24 $0.66 Dividends per share $1.91 $0.25 Balance Sheet Balance Sheet Balance Sheet Current assets $12,594 $3,733 Property, plant, and equipment, net 9,946 3,583 Goodwill 18,624 634 Other assets 6,220 1,230 Total assets $47,384 $9,180 Current liabilities $11,824 $1,936 Long-term debt 14,213 3,499 Deferred taxes 1,803 455 Other liabilities 7,032 56 Stockholders? equity 12,512 3,234 Total liabilities and stockholders? equity $47,384 $9,180 Other Data Other Data Other Data Philip Morris: Philip Morris: Common shares outstanding (millions) 920 1,003 Closing price common stock $80.25 $6.13 S&P Industrials Index: S&P Industrials Index: S&P Industrials Index: Closing price 417.09 122.55 Earnings per share 16.29 15.36 Book value per share 161.08 109.43 b. Calculate the expected return over the next year of the common stock of LCC and AOC using the capital asset pricing model. Show your work. c. Calculate the internal (implied, normalized, or sustainable) growth rate of LCC and AOC. Show your work. d. Recommend LCC or AOC for investment. Justify your choice by using your answers to a, b, and c and the information in Table 7.
Calculate the value of the common stock of LCC and AOC using the constant-growth dividend discount...
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