Question
In: Finance
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 1 year agoRelated Solutions
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