Question

Stockholders of Hudson Enterprises recently received an annual dividend of $2.50 per share. Three analysts are trying to determine the value of this stock based on expected future dividends. Each analyst uses a required return of 14%.

Use appropriate dividend valuation models in excel to find the value of Hudson stock under each of the following sets of assumptions.

a) Analyst A assumes dividends will remain constant at $2.50 for the indefinite future. Show D0, D1, r, g and Analyst A's price.

b) Analyst B assumes dividends will grow at a constant rate of 7% per year for the indefinite future. Show D0, D1, r, g and Analyst B's price.

c) Analyst C assumes dividends will grow at 14% for the next 2 years and will thereafter grow at a constant rate of 7% for the indefinite future. Show D0, D1, D2, D3, r, g and Analyst C's price.

d) Analyst D uses the market multiple approach to value a company's stock. Hudson has had an average P/E of 15 and an average P/S of 2 over the last few years. Earnings per share of $3 and sales per share of $20 are forecast for next year. What is Analyst D's price based on earnings? Based on Sales?

Answer 1

Part a
D0 = 2.50
D1 = 2.50
r = 14%
g = 0
PV of perpetual dividend = Dividend / r
Price = 2.50 / 14%
Price = 17.86
Part b
D0 = 2.50
D1 = 2.50*(1+7%) = 2.675
r = 14%
g = 7%
Terminal value = D1/( r - g)
Price = 2.675 / (14% - 7%)
Price = 38.21
Part c
Year	Dividend calculation	Dividend	PV calculation	PV present value
D0	2.5
D1	=2.5*(1+14%)	2.85	=2.85/(1+14%)^1	2.50
D2	=2.85*(1+14%)	3.25	=3.25/(1+14%)^2	2.50
Terminal value	=(3.25*(1+7%))/(14%-7%)	49.68	=49.68/(1+14%)^2	38.23
			Total Present value	43.23
Price = 43.23
Part D
Based on earnings = 15 * 3 = 45
Based on Sales = 20 * 2 = 40