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 agoRelated Solutions
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