Question

Here are some analysts’ estimates for Citigroup (the banking and financial services giant) common stock.

The recent price of this stock was $33

a. Analyst 1 has the following growth estimates. Given the following information what is the analyst’s value for Citigroup? What should the analyst recommend based on the recent price of $33?

• Current Dividend Per Share $0.72

• Required Rate of Return 12% or 0.12

• Annual Dividend Growth Rate, year 1-3 16% or 0.16

• Annual Dividend Growth Rate, year 4 to infinity 9% or 0.09

b. Analyst 2 thinks Citigroup is a constant growth stock. He expects a constant growth rate of 10% of Citigroup’s current dividend of $0.72 and estimates a required return of 12.5%. What is this analyst’s value for Citigroup? What should the analyst recommend based on the recent price of $33?

c. Citigroup's recent stock price is $33, and its current dividend is $0.72 a share. Now, let's assume that Citigroup is a constant growth stock with a required return of 12%. What is Citigroup's expected annual constant growth rate assuming the recent $33 stock price is in equilibrium?

Answer 1

c). The constant growth rate is calculated using following equation

Stock price = D0*(1+g)/(r-g)

Where, D0 is current dividend

r is required return

g is constant growth rate

On putting the values, we have

33 = 0.72*(1+g)/(0.12-g)

33*(0.12-g) = 0.72+0.72g

3.96-33g = 0.72+0.72g

0.72g+33g = 3.96-0.72

33.72g = 3.24

g = 9.61%