Question

The Gordo Company's last dividend was $1.40 (Do). Its dividend growth rate is expected to be constant at 20% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (r_s) is 10%

Find horizon value. Explain

What is the best estimate of the current stock price? Explain

If the market price of Horton Co is $27.00 per share is the stock over- or undervalued? Why do you think so?

Answer 1

Dividend of Year-0		1.4
Dividend of Year-1	1.40+20%	1.68
Dividend of Year-2	1.68+20%	2.02
Dividend of Year-3	2.02+6%	2.14
Horizon Value at Year-2 = Dividend of Year-3 / (Required return - Growth rate)
			2.14/ (10-6)% = 53.5
Price
Year	Cashflows	PVF at 10%	Present value
1	1.68	0.909091	1.53
2	2.02	0.826446	1.67
2	53.5	0.826446	44.21
Price today		47.41
Under-valued