In: Finance
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!
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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