Whole Foods’ current dividend per share is $1.07. You expect dividends to grow a

Question

Whole Foods’ current dividend per share is $1.07. You expect dividends to grow at 5% per year into perpetuity. Whole Foods’ beta is 0.85. The current riskfree rate is 2.9%, and the expected return on the market portfolio is 7.4%. Use the CAPM to estimate Whole Foods’ required return on equity. Then, using a perpetuity formula to project Whole Foods’ current dividend per share into the infinite future, and discounting at the cost of equity, what is the intrinsic (expected) value of the firm based on the projected dividends: 10pts. Show all work. Intrinsic value = $65.13 ** the answer is $65.13, how do you get that?

Explanation / Answer

Stock price = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

Required return = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 2.9%+0.85×(7.4%-2.9%)

= 6.725%

Intrinsic value:

= D1÷(r-g)

= $1.07×(1+5%)÷(6.725%-5%)

= $65.13

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