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In: Finance

Your task is to value Shake Shack's (SHAK’s) stock. Shake Shack's dividends two, four, and five...

Your task is to value Shake Shack's (SHAK’s) stock. Shake Shack's dividends two, four, and five years from now are expected to be, respectively, $3.25, $4.10, and $4.50. (Shake Shack has announced that it’ll not pay any dividends at t=1 and t=3, instead using nearly all free cash to add restaurants across the country.) Across years 6 and 7 and 8, dividends will grow by 7%/year. The dividends are projected to grow, after that, at a constant rate of 3% forever. SHAK has a debt-to-equity ratio (in market-value terms) of 1.0. The yield to maturity on SHAK's bonds averages 4% and the company's tax rate is 30%. If the risk-free rate is 2.2%, the market risk premium is 6%, and SHAK's equity beta is 1.25, what should the stock sell for today based on a discounted valuation of its projected dividends?

Solutions

Expert Solution

cost of equity = 2.2% + 1.25*6% = 9.70%

WACC = (4%*0.7 + 9.70%)/2 = 6.25%

Discount rate 6.2500%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
                             -   0                                            -                                           -  
                             -   1                                            -                                           -  
                      3.250 2                                        2.88                                    2.88
                             -   3                                            -                                      2.88
                      4.100 4                                        3.22                                    6.10
                      4.500 5                                        3.32                                    9.42
                      4.815 6                                        3.35                                  12.77
                      5.152 7                                        3.37                                  16.14
                 163.280 7                                   106.81                                122.95

price = 122.95

jeff jeffy answered 2 years ago
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