Question

PLEASE SHOW WORK! I WILL GIVE IT A THUMBS UP AND COMMENT!

Riskfree rate = 0.016                            Market rate = 0.078

t is the current year.  In general, the EPS and dividend for t will be given.

1.         Open Text has a beta of 0.95.  What is its required return?

2.         New York Community Bank has a beta of 0.95 and a fixed dividend of $0.68.  What is its intrinsic value?  If it’s currently trading at about $9.86 a share, is it over or under valued?

3.         The Carlisle Companies has a beta of 1.00, an expected dividend of $2.10 next year, and an 3% growth rate.  If it’s trading at $123.68, is it over or under valued?

4.         Using the information below and the CD&E model, forecast Carlisle’s cash flows for t+1, t+2, and t+3 to determine whether Carlisle is over or under valued if it’s trading at $123.68.  

	t	t-1	t-2	t-3
EPS	$9.05
DPO		0.23	0.22	0.26
ROE		0.17
Beta	1.95
P/E		18.7	18.7	17.2

5.         Axis Capital’s three most recent P/Es are 21.6, 28.6, and 12.5.  Its current EPS is expected to be $5.50.  If its current price is $37.54, is it over or under valued?

6.         Use the information below and the Two-stage Growth Model to find Axis Capital’s intrinsic value.  Forecast its cash flows from t+1 to t+3.  If its current price is $37.54, is it over or under valued?

	t	t+1	t+2	t+3	t+4
Beta	0.80
ROE		0.09	0.08	0.08	0.08
DPO		0.37	0.34	0.34	0.34
Div	$1.64

Answer 1

1.
required return=risk free rate+beta*(market return-risk free rate)
=0.016+0.95*(0.078-0.016)
=0.0749

2.
Intrinsic Value=Dividend/required return
=0.68/0.0749
=9.078771696

Overvalued as it is selling for more than intrinsic value

3.
required return=risk free rate+beta*(market return-risk free rate)=0.016+1*(0.078-0.016)=0.078

Intrinsic value=Expected Dividend/(required return-growth rate)=2.10/(0.078-3%)=43.75

Overvalued as it is selling for more than intrinsic value

5.
Intrinsic Value=Average PE*EPS
=(21.6+28.6+12.5)/3*5.50
=114.95

Undervalued as it is selling for less than intrinsic value