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 2 years agoRelated Solutions
Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of...
Shell is experiencing rapid growth. Earnings and dividends are
expected to grow at a rate of 15% during the next 2 years, at 13%
the following year, and at a constant rate of 6% during Year 4 and
thereafter. Its last dividend was $1.15, and its required rate of
return is 12%.
b) Find the PV of the firm’s stock price at the end of Year
3.
f) Calculate the dividend and capital gains yields for Years 1,
2, and...
Willow Plastic Parts Inc. is experiencing rapid growth. Earnings and dividends are expected to grow at...
Willow Plastic Parts Inc. is experiencing rapid growth. Earnings
and dividends are expected to grow at a rate of 18% during the next
2 years, 14% the following year, and then a constant rate of 6%
during Year 4 and beyond.
Willow’s last dividend was $2.25.
The risk-free rate of return is 1.00%. Willow has a market Beta
of 1.3 and the Expected Return of the Market is 22.0%.
Calculate the intrinsic value of the stock today. (Vo)
If...
Wildhorse, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Wildhorse, Inc., is a fast-growing technology company.
Management projects rapid growth of 30 percent for the next two
years, then a growth rate of 17 percent for the following two
years. After that, a constant-growth rate of 8 percent is expected.
The firm expects to pay its first dividend of $2.45 a year from
now. If dividends will grow at the same rate as the firm and the
required rate of return on stocks with similar risk is 21 percent,...
Ivanhoe, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Ivanhoe, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a
growth rate of 17 percent for the following two years. After that,
a constant-growth rate of 8 percent is expected. The firm expects
to pay its first dividend of $2.63 a year from now. If dividends
will grow at the same rate as the firm and the required rate of
return on stocks with similar risk is 17 percent,...
Sheridan, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Sheridan, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a
growth rate of 17 percent for the following two years. After that,
a constant-growth rate of 8 percent is expected. The firm expects
to pay its first dividend of $2.75 a year from now. If dividends
will grow at the same rate as the firm and the required rate of
return on stocks with similar risk is 15 percent,...
Blossom, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the...
Blossom, Inc., is a fast-growing technology company. Management
projects rapid growth of 30 percent for the next two years, then a
growth rate of 17 percent for the following two years. After that,
a constant-growth rate of 8 percent is expected. The firm expects
to pay its first dividend of $2.25 a year from now. If dividends
will grow at the same rate as the firm and the required rate of
return on stocks with similar risk is 15 percent,...
Nonconstant growth: Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent...
Nonconstant growth: Tre-Bien, Inc., is a
fast-growing technology company. Management projects rapid growth
of 30 percent for the next two years, then a growth rate of 17
percent for the following two years. After that, a constant-growth
rate of 8 percent is expected. The firm expects to pay its first
dividend of $2.45 a year from now. If dividends will grow at the
same rate as the firm and the required rate of return on stocks
with similar risk is...
2. Wildhorse, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for...
2. Wildhorse, Inc., is a fast-growing technology company.
Management projects rapid growth of 30 percent for the next two
years, then a growth rate of 17 percent for the following two
years. After that, a constant-growth rate of 8 percent is expected.
The firm expects to pay its first dividend of $2.35 a year from
now. If dividends will grow at the same rate as the firm and the
required rate of return on stocks with similar risk is 22...
2. Wildhorse, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for...
2. Wildhorse, Inc., is a fast-growing technology company.
Management projects rapid growth of 30 percent for the next two
years, then a growth rate of 17 percent for the following two
years. After that, a constant-growth rate of 8 percent is expected.
The firm expects to pay its first dividend of $2.35 a year from
now. If dividends will grow at the same rate as the firm and the
required rate of return on stocks with similar risk is 22...
Carla Vista, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for...
Carla Vista, Inc., is a fast-growing technology company.
Management projects rapid growth of 30 percent for the next two
years, then a growth rate of 17 percent for the following two
years. After that, a constant-growth rate of 8 percent is expected.
The firm expects to pay its first dividend of $2.26 a year from
now. If dividends will grow at the same rate as the firm and the
required rate of return on stocks with similar risk is 22...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- What 2 things happen to the melting point of a solid when an impurity is present?
- How Can Hominin Evolution be characterized as " mosaic evolution" Use examples of species from the...
- Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
- Mobile and wireless devices are being increasingly used in the Business Administration and Management Industry. write...
- What are the options that might be considered in relation to introducing flexible work practices? What...
- Question 2 : Aggregate Scores: Write a program that opens 2 files, quiz.txt, and hw.txt. The...
- Define the term symbiosis specifically as it applies in a biological context. Compare and contrast parasitism,...
ADVERTISEMENT