Smirnoff & Co is facing a rapid growth in earnings and dividends. Management projects that dividends...

Smirnoff & Co is facing a rapid growth in earnings and dividends. Management projects that dividends will grow at a rate of 12% during year 1, 10% during year 2, and 8% during year 3.

After that growth slows down to a normal rate of 5%. Company's required return is 9%. Last dividend paid (Do) was $3.50 per share.

Find: a. Horizon stock price;

b. Intrinsic stock value today.

c. Is the stock overpriced or underpriced if the market price today is $20 per share? Will an analyst issue a Buy or a Sell signal to the clients?

Solutions

Expert Solution

	Required rate=	9.00%
Year	Previous year dividend	Dividend growth rate	Dividend current year	a. Horizon value	Total Value	Discount factor	Discounted value
1	3.5	12.00%	3.92		3.92	1.09	3.5963
2	3.92	10.00%	4.312		4.312	1.1881	3.62932
3	4.312	8.00%	4.65696	a. 122.245	126.90196	1.295029	97.9916
	Long term growth rate (given)=	5.00%			*b. Value of Stock =*	*Sum of discounted value =*	*105.22*

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year

Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

CMP at 20 is underpriced, analyst should issue a buy

jeff jeffy answered 10 months ago

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