Question

Hello, I am having difficulty with this assignment. I chose Amazon as my stock, but I am confused on what they're asking :

            Choose a stock that interests you. Utilizing Bloomberg (or other financial websites) as a source of data, collect the following      information:

                        a. The stock’s Beta

                        b. The rate of return on the market (S&P 500 Index)

                        c. The risk-free rate (rRF)

                        d. The last dividend paid (D0)

                        e. The annual expected growth rate of earnings

B.        In Excel, use the Discounted Dividend Model for Constant Growth Stocks and solve for the             intrinsic stock price (P0)

            Based on your above calculations, compare the calculated price with the current market price and indicate whether is the stock price overvalued, undervalued, or at equilibrium? Explain.

C.        Now, assume that your company has just released a new product and will be experiencing supernormal growth of 30% for the next three years. In Excel, use the information in “A” and the Discounted Dividend Model for Nonconstant Growth Stocks and solve for the intrinsic stock price (P0).

Answer 1

Answer to Part (A)

		Aberrations	Source
1	The stock’s Beta (Beta)	Beta	Yahoo Finance	1.25
2	The rate of return on the market (S&P 500 Index)	Rm	Yahoo Finance	10.00%
3	The risk-free rate (rRF)	Rf	Yahoo Finance	4.00%
4	The last dividend paid (D0)	D0	Yahoo Finance	$          -
5	The annual expected growth rate of earnings	g	Yahoo Finance	8.00%
6	P/E Ratio	PE	Yahoo Finance	88.78
7	Earning Per Share	EPS	Yahoo Finance	$   23.01

Now, Let's calculate Cost of Equity (Ke)

Ke = Rf + Beta (Rm - Rf)

Ke = 4.00% + 1,25 (10.00% - 4.00%)

Ke = 11.50%

Answer to Part (B)

As per Divident Discount Model

Ke = D1/Po + g

Now, Since amazon has not given any dividend before in its history. Let's Assuma the D1 = $ 100 Per Share

11.50% = 10/Po + 8%

Po = 10/3.50%

Po = 2857.143

Intrinsic stock price (Po) = $ 2857.143

Answer to Part (C)

	Growth Rate of Dividend	30%
	Current Dividend Per Share	$                      100.00
Year	Dividend Per Share (DPS) (1)	PVF AT 11.50% (2)	PV OF DPS (1 * 2)
1	$                                                                          130.00	0.896860987	$                     116.59
2	$                                                                          169.00	0.804359629	$                     135.94
3	$                                                                          219.70	0.721398771	$                     158.49
			$                     411.02
=	Intrinsic stock price at the end of Year 3	D3/Ke - g	$                  1,910.35
=	Pv of Intrinsic stock price (Po)	$ 1910.35 * 0.721398	$                  1,378.13