1. The earnings of Best Forecasting Company are expected to grow at an annual rate of...

1. The earnings of Best Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Best currently pays a dividend of $0.36 per share. What is the value of Best stock to an investor who requires a 16% rate of return? If stock has a market price of $15 do you buy? Please include the excel formulas.

Expert Solution


	Current Dividend per share D0=$0.36		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Future Dividend Values with 14% growth uto Yr 5		$ 0.410	$ 0.468	$ 0.533	$ 0.608	$ 0.693
	Yr 6 Dividend with 10% growth							$ 0.762
	Termial Value of Dividends at Yr 6=0.762(1+10%)/(16%-10%)							$ 13.97
	Using Terminal Value formula =D0(1+g)/(k-g) , where D0 =yr 6 dividend, g=growth rate 10%, k=cost of equity 16%
a	Total Dividends and Terminal Values receivable		$ 0.410	$ 0.468	$ 0.533	$ 0.608	$ 0.693	$ 14.732
b	PV factor at 16% required rate=1/1.16^n		0.862	0.743	0.641	0.552	0.476	0.41
c	PV of all future dividends and terminal value =a*b=		$ 0.354	$ 0.348	$ 0.342	$ 0.336	$ 0.330	$ 6.040
d	Current Stcok value =Sum of ( c ) all PV of dividends & TV receivable	$ 7.75

So the intrinsic value per share is $7.75
Market Price is $15 per share
As the Market Price is overvalued, I shall not buy the share.

jeff jeffy answered 2 years ago

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