You’ve collected the following information from your favorite financial Web site
ID: 2779165 • Letter: Y
Question
You’ve collected the following information from your favorite financial Web site.
According to your research, the growth rate in dividends for SIR for the next five years is expected to be 21.0 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.75 percent indefinitely. Assume investors require an 14 percent return on SIR stock.
According to the dividend growth model, what should the stock price be today? (Do not include the dollar sign ($). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valued?
52-Week Price Stock (Div) DivYld % PE
Ratio Close
Price Net
Chg Hi Lo 77.40 10.43 Palm Coal 0.36 2.6 6 13.90 –0.24 55.81 33.42 Lake Lead Grp 1.54 3.8 10 40.43 –0.01 130.96 69.65 SIR 2.15 2.4 10 89.00 3.07 50.24 13.95 DR Dime 0.80 5.2 6 15.43 –0.26 35.00 20.74 Candy Galore 0.32 1.5 28 ?? 0.18
Explanation / Answer
where,
As per dividend discount model intrinsic value of stock is 50.025 which is lower than current market value of 89, thus stock is overpriced.
required return = 14% Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 2.15 21% 2.6015 2.6015 1.14 2.282017544 2 2.6015 21% 3.147815 3.147815 1.2996 2.422141428 3 3.147815 21% 3.80885615 3.80885615 1.481544 2.570869411 4 3.80885615 21% 4.608715942 4.608715942 1.68896016 2.728729813 5 4.608715942 21% 5.576546289 71.48118425 77.05773054 1.925414582 40.02137059 6 5.576546289 5.75% 5.897197701 Value of stock = Sum of discounted value= 50.02512879Related Questions
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