Question

In: Finance

Bed Bath & Beyond Inc., (BBBY) together with itssubsidiaries, operates a chain of retail stores....

Bed Bath & Beyond Inc., (BBBY) together with its subsidiaries, operates a chain of retail stores. The company sells a range of domestics’ merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and various juvenile products. BBBY just paid a year-end dividend of $2.00. Investors expect the dividends to grow at 20% for the next three years and after which the dividend is expected to grow at a rate of 7% forever. BBBY’s stockholders require a rate of rate of return of 15%. BBBY’s stock is currently trading at $42.  

Required:

Calculate the price (intrinsic value) of BBBY’s stock and discuss whether this stock is over or undervalued.

Solutions

Expert Solution

Value of the Stock = PV of Dividends during first 3 years + PV of terminal price

PV of Dividends durind first three years =

=D1 + D2 + D3

=2*1.2/(1+.15) + 2*(1.2)^2/(1+.15)^2 + 2*(1.2)^3/(1+.15)^3 = 2.08 + 2.177 + 2.272 = 6.53

Value of Equity for Perpetuity with Gordan Growth Model = D4/r-g =

​D4=the estimated value of fourth year’s dividend = D3*(1.07) = 3.69

r=the company’s cost of capital equity

g=the constant growth rate for dividends, in perpetuity​

Terminal Value at fourth year = 3.69/(.15-.07) = 46.224

present value = 46.224/(1+expected return^3) = 30.39

therefore intrinsic value of stock = pv of (D1+D2+D3+ Terminal Value) = 2.08 + 2.177 + 2.272+30.39

=36.93 , comparing to $42 trading price , stock is over valued.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Big Box Chain Inc., (BBC) together with its subsidiaries,operates a chain of retail stores. The...
Big Box Chain Inc., (BBC) together with its subsidiaries, operates a chain of retail stores. The company sells a range of domestics’ merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and various juvenile products. BBC just paid a year-end dividend of $2.00. Investors expect the dividends to grow at 20% for the next three years and after which the...
Based on Bed Bath & Beyond’s 2019 10-K. If Bed Bath & Beyond adopted IFRS would...
Based on Bed Bath & Beyond’s 2019 10-K. If Bed Bath & Beyond adopted IFRS would its reporting for inventory differ? Briefly explain. Identify other areas that would be impacted if your company adopted IFRS.
In July 2020 it was announced that Bed Bath & Beyond Inc., would be closing 200...
In July 2020 it was announced that Bed Bath & Beyond Inc., would be closing 200 stores over the next two years. (i) Create a cause-and-effect diagram for this situation. (ii) Provide a detailed description of the most likely causes of the situation.
Nina's Fashions, Inc., operates a chain of retail clothing stores in Michigan, Wisconsin, and Illinois. The...
Nina's Fashions, Inc., operates a chain of retail clothing stores in Michigan, Wisconsin, and Illinois. The company has been in business since 1953, and until about 15 years ago, all of its stores were in older, downtown locations. However, in the late 1970s, the chain opened its first suburban store which differed significantly from the older stores. The new store was much larger, stocking many more items than the old stores. Many new stores followed, which were primarily located in...
Bed Bath & Beyond is primarily a bricks and mortar company. Most of its products are...
Bed Bath & Beyond is primarily a bricks and mortar company. Most of its products are available online through Amazon.  The company was late to e-commerce and has been playing catch up, investing in upgrading its online presence, introducing mobile apps and rolling out a new point-of-sale system.   On the plus side, sales from digital channels have been increasing, but conversely, same-store sales at the brick and mortar stores have been flat. That’s a problem because online sales have lower margins...
Bed Bath & Beyond is primarily a bricks and mortar company. Most of its products are...
Bed Bath & Beyond is primarily a bricks and mortar company. Most of its products are available online through Amazon. The company was late to e-commerce and has been playing catch up, investing in upgrading its online presence, introducing mobile apps and rolling out a new point-of-sale system. On the plus side, sales from digital channels have been increasing, but conversely, same-store sales at the brick and mortar stores have been flat. That’s a problem because online sales have lower...
-Financial Management Principles German Technologies Inc. operates a small chain of speciallity retail stores throughout the...
-Financial Management Principles German Technologies Inc. operates a small chain of speciallity retail stores throughout the U.S. southwest. The conpamy markets technology-based consumer products both in its stores and over the internet, with sales split roughly equally between the two channel distribution. The company’s products range from radar detection devices and GPS mapping systems used in automobiles to home-based weather monitoring stations. The company recently began investigating the possible acquisition of a regional wearhousing faciltiy that could be used to...
Please record the journal entries for the following transactions: 14 Assume Bed Bath & Beyond uses...
Please record the journal entries for the following transactions: 14 Assume Bed Bath & Beyond uses the first-in, first-out (FIFO) cost flow assumption for valuing inventories. The beginning inventory and a sample of purchases were used to value inventories. These amounts were: beginning inventory (3/15/17) 58,042 units @ $47.05 each; purchase 3/19/17, 6,000 units @ $48 each; purchase 5/6/17, 11,500 units @ $49 each; purchase 6/9/17, 8,000 units @ $52 each; purchase 8/21/17, 11,000 units @ $54 each; purchase 9/12/17,...
Buckeye Department Stores, Inc. operates a chain of department stores in Ohio. The company’s organization chart...
Buckeye Department Stores, Inc. operates a chain of department stores in Ohio. The company’s organization chart appears below. Operating data for 20x1 follow. BUCKEYE DEPARTMENT STORES, INC. Operating Data for 20x1 (in thousands) Columbus Division Olentangy Store Scioto Store Downtown Store Cleveland Division (total for all stores) Sales revenue $ 5,000 $ 2,500 $ 12,000 $ 22,000 Variable expenses: Cost of merchandise sold 3,000 2,100 6,000 13,000 Sales personnel—salaries 500 310 760 1,700 Sales commissions 60 50 90 220 Utilities...
Terry Linens Inc. manufactures bed and bath linens. The bath linens department sews terry cloth into...
Terry Linens Inc. manufactures bed and bath linens. The bath linens department sews terry cloth into towels of various sizes. Terry uses the weighted average method. All materials are added at the beginning of the process. The following data are for the bath linens department for August: Production: Units in process, August 1, 25% complete* 25,500 Units completed and transferred out 83,000 Units in process, August 31, 60% complete* 34,000 * With respect to conversion costs. Required: Calculate equivalent units...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT