Saunders Corp. has paid out a per-share dividend of $4 on its common stock for the...

Saunders Corp. has paid out a per-share dividend of $4 on its common stock for the year just ended. Analysts expect that the company’s earnings and dividends per share will grow at a rate of 12% for the coming 5 years, and then begin to grow at a constant rate of 3.5% for the foreseeable future after that. The company’s stock has a beta of 1.50. The proxy for the risk-free rate stands at 2.5%, and the market risk premium is estimated to be 5%. What should each share of Saunders stock be trading for today?

*Please solve using an explanation within an Excel file. Thank you!

Solutions

Expert Solution

Note 1	Growth
	First 5 years	12%
	Thereafter	3.50%

Note 2	DPS (year 0)	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Cont….
	$4.00	$4.48	$5.02	$5.62	$6.29	$7.05	$7.30	$7.55	…..........

	Beta	1.5
	Rf	2.50%
	Rm-Rf	5%

Note 3	ke =	*Rf+(Rm-Rf)Beta**
		10.0%

Note 4	Share price =	Present value of cash inflows (Dividend) discounted @ Ke
	PV of Div (5 years)	$21.12	( Please refer attached image for calculation	)
	PV of Div (beyond 5 years)	$180.78	( Please refer attached image for calculation	)
	Share Price (Po)	$201.89

	Explanation:	Calculate Dividend for first 6 years as calculated in Note 2
		Discount the dividend using Ke calculated at Note3 for first five years.
		calculate Price at end of year 5 (Po) using formula [D1/(Ke-G)] and discount it with 1/(1+0.1)^5 to bring it to year 0 Po or Share price today will be the sum total of above two calculations.

jeff jeffy answered 1 year ago

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