Question

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.

Answer 1

	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.