Question

Common stock is trading at $45 per share

The 2020 dividend has dropped to $5.00 per share

Dividends are expected to grow by 15% per year in 2021, 2022, and 2023.

The 2024 dividend is expected to be 5% higher than that of 2023, and dividends are expected to grow at the rate of 5% p.a. thereafter into the indefinite future

Cost of equity capital is 20%

1.  valuation would you place on the company's common stock?

2. Is the stock overvalued or undervalue ?

Answer 1

Year	2020	2021	2022	2023	2024
Dividend	5.00	5.75	6.61	7.60	7.98
Growth rate		15%	15%	15%	5%
Terminal Value					55.89	<--Div Year 4*(1+growth rate)/(Cost of equity-Growth rate),7.98*(1+5%)/(20%-5%)
Cash Flows	5.00	5.75	6.61	7.60	63.88
Discounted Cash Flows	4.79	4.59	4.40	30.80
Total PV of cash Flows	45					<--Stock price

The above table gives the case facts along with the stock price as per DCF

As the current share price and the price as per DCF are same, the stock is fairly priced

Please reach out for any further clarifications