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 Questar’s common stock on Tuesday 11/20/12
2. Questar’s annual dividend, projected for next year
3. The current analysts’ average estimate for Questar’s EPS for this year (Dec. ‘12)
4. The current analysts’ average estimate for next year’s EPS (Dec. ‘13)
5. The current analysts’ average estimate of Questar’s 5-yr EPS growth
a. Based on the following given information, what rate of return should Questar’s
shareholders require on their investment?
E(rm) = 8.5% Rf = 1.0% Questar’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 Questar’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 Questar’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 ‘12 [part 1, item 3])?
f. Using your answer to (f), and assuming that Questar’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)?