12. Using the above forecasts, determine the intrinsic value of High Flyer share

Question

12. Using the above forecasts, determine the intrinsic value of High Flyer shares. Use the discounted dividends model; assume the forecast dividend payment in 2011 is $0.35 and that it will growth by 8% per year in perpetuity. The appropriate intrinsic value is: a. $3.933 b. $4.024 c. $4.504 d. $4.508 e. $4.988 <<< 5?

(in thousands except per share data) Actual Estimated Estimated Estimated 2007 2008 2009 2010 Net Income 225,000 200,000 215,000 230,000 Total Dividends Paid 48,000 20,000 25,000 30,000 Book Value of Equity 1,500,000 Total Liabilities 1,000,000 CFFO 400,000 150,000 200,000 250,000 CFFI -250,000 -100,000 -200,000 -200,000 Dividends Per Share 0.48 0.20 0.25 0.30 Shares Outstanding (12/31/07) 100,000 Cost of Equity 0.14 Cost of Debt 0.08 WACC(bt) 0.11

Explanation / Answer

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WACC 11.60% Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 0.48 0% 0.2 0.2 1.116 0.17921147 2 0.2 0% 0.25 0.25 1.245456 0.200729693 3 0.25 0% 0.3 0.3 1.389928896 0.215838379 4 0.3 0% 0.35 10.5 10.85 1.551160648 6.994762286 5 0.35 8% 0.378 Value of stock = Sum of discounted value= 7.590541827

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