Question

In: Finance

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.



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