Questar Financial Analysis
Finance 3050 Homework #2 Autumn 2012
Due Thursday 11/29/12 15 points
I. Visit the website http://finance.yahoo.com and gather the following information for
Questar (ticker symbol: STR):
1. The closing price for Questarâ€™s common stock on Tuesday 11/20/12
2. Questarâ€™s annual dividend, projected for next year
3. The current analystsâ€™ average estimate for Questarâ€™s EPS for this year (Dec. â€˜12)
4. The current analystsâ€™ average estimate for next yearâ€™s EPS (Dec. â€˜13)
5. The current analystsâ€™ average estimate of Questarâ€™s 5-yr EPS growth
a. Based on the following given information, what rate of return should Questarâ€™s
shareholders require on their investment?
E(rm) = 8.5% Rf = 1.0% Questarâ€™s beta = .44
b. If Questar retains 44% of its earnings, and can earn a return of 3% on reinvested funds, at
what rate can dividends grow indefinitely?
c. Based on your answer to (a) and information obtained in part I, if Questarâ€™s dividend
(Part I, item 2) is expected to grow indefinitely at the rate found in part (b), what is a
share of Questar stock worth today? (Assume that the dividend you found in part I is D0 )
d. By how much is Questar stock overpriced or underpriced when comparing your answer to
part (c) with the current price (part I, item 1)?
e. If Questarâ€™s earnings grow at the estimated growth rate for 5 years (item I, part 5), what
will EPS be at the end of 2017 (begin with the EPS estimate for â€˜12 [part 1, item 3])?
f. Using your answer to (f), and assuming that Questarâ€™s P/E ratio is 16.1 at the end of
2017, what should a share of stock sell for at that time?
g. Assume that dividends will not grow for the next 5 years. If you buy a share of Questar
stock at the current price (part I, item 1), receive the current dividend (part I, item 2) for
each of the next 5 years, then sell the stock for the price found in (g), what will be your
dollar-weighted average annual rate of return (Calculate IRR using P0, D1-D5 and P5)?
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