International Flavors and Fragrances, a leading creator and manufacturer of flavors and fragrances, paid out dividends of $0.91 per share on earnings per share of $1.64 in 1992. The firm is expected to have a return on equity of 20% between 1993 and 1997, after which the firm is expected to have stable growth of 6% a year. The return on equity is expected to drop to 15% in the stable growth phase. The dividend payout ratio is expected to remain at the current level from 1993 to 1997. The stock has a beta of 1.10, which is not expected to change. The treasury bond rate is 7%.
a. Estimate the PE ratio for International Flavors, based upon fundamentals.
b. Estimate how much of this PE ratio can be ascribed to the extraordinary growth in earnings that the firm expects to have between 1993 and 1997.
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