Choose 2 firms that interest you and download their financial statements from any of these websites: finance.yahoo.com, finance.google.com, or money.msn.com.
1. For each firm, find the return on equity (ROE), the number of shares outstanding, the dividends per share, and the net income. Record them in a spreadsheet.
2. Calculate the total amount of dividends paid (dividends per share × number of shares outstanding), the dividend payout ratio (total dividends paid/net income), and the plowback ratio (1 − dividend payout ratio).
3. Compute the sustainable growth rate, g = b × ROE, where b equals the plowback ratio.
4. Compare the growth rates (g) with the P/E ratios of the firms by plotting the P/Es against the growth rates in a scatter diagram. Is there a relationship between the two?
5. Calculate intrinsic value of the two firms using dividend discount model and compare with market price. What is your opinion on the prices of the two stocks?