Question

Company XYZ's earnings per share is 0.8$ in 2017 and paid dividends per share is 0.48$...

Company XYZ's earnings per share is 0.8$ in 2017 and paid dividends per share is 0.48$ , the firm is expected to have earnings growth of 25% in 2018. and then this growth rate is expected to decline linearly over a 6 year period to stable growth rate of 7%. the company's beta is 0.85 , tbill rate is 6.25%. risk premium on market portfolio is 4%. assume capm holds. also assume that growth rate in initial growth phase is not a constant but declines linearly over time to reach stable growth rate
Using two stage ddm estimate the intrinsic value. how much was attributed to extraordinary growth? how about stable growth? show solution.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Current dividend per share , D0 =$ 0.48

abnormal growth rate, g1 = 25% = 0.25

H = 6/2 = 3 years

normal growth, g2 = 7% = 0.07

required rate of return , r = risk free return + (beta* risk premium on market portfolio) = 6.25 + (0.85*4) = 9.65% = 0.0965

intrinsic value = value due to extraordinary growth + value due to stable growth

value due to extraordinary growth = (D0*H*(g1-g2))/(r - g2) = (0.48*3*(0.25-0.07))/(0.0965 - 0.07) = 0.2592/0.0265 = 9.781132075 or $9.78 ( rounding off to 2 decimal places)

value due to stable growth = (D0*(1+g2))/(r-g2) = (0.48*(1.07))/(0.0965-0.07) = 0.5136/0.0265 = $19.38113208 or $19.38( rounding off to 2 decimal places)

intrinsic value = 9.781132075 + 19.38113208 =$ 29.16226416 or $29.16 ( rounding off to 2 decimal places)

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
JKL company's earnings per share and dividend growth rates are first 3 years: 12%/year after: 9%/year...
JKL company's earnings per share and dividend growth rates are first 3 years: 12%/year after: 9%/year they pay a dividend if 1.72$ / share recently. the rate of return is required to be at 16% 1) estimate intrinsic value of a share. how much can be attributed to extraordinary growth? how about stable growth?
Assume that XYZ Company generated cash flows of $2.00 per share last year. XYZ's cost of...
Assume that XYZ Company generated cash flows of $2.00 per share last year. XYZ's cost of capital is 12%. Estimate the value per share of XYZ for each of the following sets of assumptions. A- No future growth is expected. B- Constant future growth of 6% is expected. C-Growth of 10% per year is expected for the next three years, followed by constant growth of 6%. D-Growth is expected to decline from 10% to 6% over the next four years,...
Dividends discount model: The MBS Corporation’s dividends per share are expected to grow indefinitely by 5%...
Dividends discount model: The MBS Corporation’s dividends per share are expected to grow indefinitely by 5% per year. DDa.       If this year-end dividend is $8 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM (Dividends Discounting Model)? DDb.      If the expected earnings per share are 12$, what is the implied value of the ROE on future investment opportunities? DDc.       How much is the market paying per share for growth opportunities (i.e., for...
HigherEducation, Inc., a private educational company's share price is $110 per share; earnings and dividends are...
HigherEducation, Inc., a private educational company's share price is $110 per share; earnings and dividends are $7.00 a share, and the growth rate is zero. They have just announced a new growth strategy whereby the company's earnings would begin growing by 3% per year and remain stable at this new rate. This new growth strategy will require the company to reinvest 50% of their earnings starting at the end of this year (t = 1). What will happen to the...
Pipi Storm Corporation has just paid dividends of R2.12 per share. Assume that over the next...
Pipi Storm Corporation has just paid dividends of R2.12 per share. Assume that over the next three years dividends will grow as follows: 25% in year one; 12% in year two; and 10% in year three. After that, growth is expected to level off to a constant growth rate of 7% per year. The required rate of return is 12%. Use the multistage model to calculate the intrinsic value of the share.
Laurel Enterprises expects earnings next year of $4 per share. The company will pay out all...
Laurel Enterprises expects earnings next year of $4 per share. The company will pay out all of its earnings to investors. Its expected return on new investment (i.e., ROE) is 12%. The required rate of return is 10%. What is the intrinsic value of the stock today? Laurel Enterprises expects earnings next year of $4 per share. The company will retain $2.4 of its earnings to reinvest in new projects that have an expected return of 12% per year (i.e.,...
Communications Fiji Limited just paid dividends of $2 per share. Assume that over the next three...
Communications Fiji Limited just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using the multistage model.
Micro Corp. just paid dividends of $2 per share. Assume that over the next three years...
Micro Corp. just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using the multistage model. What is the value of stock two years from now? If it is trading at...
A company XYZ paid a dividend of Rs.12 per share yesterday and is expected to pay...
A company XYZ paid a dividend of Rs.12 per share yesterday and is expected to pay dividend once per year in the future (at same calendar date as this year) which will grow at a rate 5% to eternity. a) Draw the cash flow diagram. (1) b) If the expected market return is 12%, the risk-free rate is 5%, and the CAPM beta of the company XYZ is 0.8, what is the expected return on equity of the company? (2)...
Hewlett-Packard’s (HP) expected dividends for the coming year are $0.60 and expected earnings per share are...
Hewlett-Packard’s (HP) expected dividends for the coming year are $0.60 and expected earnings per share are $0.80. The required rate of return for HP is 15%. HP’s ROE is 18% and plowback ratio is 25%. Using the constant-growth dividend discount method, calculate the firm’s intrinsic value. (10 points) Calculate the present value of growth opportunities for HP. (10 points) Suppose you found a positive PVGO for HP. In this case, should the firm continue with its current dividend policy or...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT