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Medtronic Inc., the world's largest manufacturer of implantable biomedical devices, reported earnings per share in 2017...

Medtronic Inc., the world's largest manufacturer of implantable biomedical devices, reported earnings per share in 2017 of $3.95 and paid dividends per share of $0.68. Its earnings are expected to grow by 16% in 2018 and in 2019; the growth rate is expected to decline each year after that to a stable growth rate of 6% in 2021. The payout ratio is expected to remain unchanged from 2017 to 2019, after which it will increase each year to reach 50% in steady state. The stock is expected to have a beta of 1.25 from 2018 to 2019, after which the beta would decline each year to reach 1.00 by the time the firm becomes stable. The treasury bond rate is 1.25% and the equity risk premium is 5.5%.

(i)Assuming that the growth rate declines linearly (and the payout ratio increases linearly) from 2020 to 2021, estimate the dividends per share each year from 2018 to 2021.

(ii)Estimate the expected price at the end of 2021.

(iii)Estimate the value per share, using the three-stage dividend discount model.

Expert Solution

First of all we will calculate Growth rate payout ratio and beta of 2018, 2019, 2020, 2021

Year	Growth Rate	Payout	Beta
2019	16	17.22%	1.25
2020	11	33.61%	1.13
2021	6	50.00%	1.00

i) Calculation of Dividend

Particulars	2017	2018	2019	2020	2021
EPS	3.95	4.58	5.32	5.90	6.25
Payout Ratio	17.22%	17.22%	17.22%	33.61%	50.00%
Dividend	0.68	0.79	0.92	1.98	3.13

ii) Now we will calculate Ke for all the years

Year	Rf	(Rm-Rf)	Beta	Ke = Rf + (Rm-Rf)*Beta
2017	1.25	5.5	1.25	8.13
2018	1.25	5.5	1.25	8.13
2019	1.25	5.5	1.25	8.13
2020	1.25	5.5	1.13	7.44
2021	1.25	5.5	1.00	6.75

Stock Price at 2021 = Dividend of 2021 x (1+g) / ke-g

Stock Price = 3.13*1.06 / 0.0675-.06 = 442.37

iii) Calculation of value per share

Note: Present Value will be calculated as under

eg: PV of Dividend of 2020 = 1.98 / (1.0744*1.0813*1.0813) = 1.58

Year	Dividend	Stock Price	Total	Ke	Present Value
2018	0.79		0.79	8.13	0.73
2019	0.92		0.92	8.13	0.78
2020	1.98		1.98	7.44	1.58
2021	3.13	442.37	445.50	6.75	332.25
					335.34

Value of Stock = 335.34

jeff jeffy answered 1 year ago

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