Question

Please show the work

Utah Minerals & Mining (UMM) has a market price of $22.56 and paid $0.80 in dividends for the current year. UMM’s dividends are expected to grow 10% annually for the next three years, and then at 5% annually thereafter. UMM’s beta is 0.70, the riskless interest rate is 3%, and the market risk premium is 7%. With this information, use a two-stage DDM to estimate UMM’s value per share. (Enter your answer to the nearest $0.01. Leave the $ sign off. In other words, if your answer is $55.55, enter 55.55 for your answer.)

Answer 1

Here , Dividend in current year , D0= $0.80

D1= 0.8*1.1 =$0.88

D2= $0.88*1.1 =$0.968

D3= $0.968*1.1 = $1.0648

D4= $1.0648*1.05 = $1.11804 (constant growth rate (g) of 5%)

From CAPM, Required rate (r) = 3%+0.7*7% = 7.9%

The Horizon value (when constant growth starts) at the end of year 3

H3= D4/(r-g) = 1.11804/(0.079-0.05) =$38.5531

So, UMM’s value per share as per two stage DDM model

= D1/(1+r)+ D2/(1+y)^2+D3/(1+y)^3+H3/(1+y)^3

=0.88/1.079+ 0.968/1.079^2+1.0648/1.079^3+38.5531/1.079^3

=$33.1845 or $33.18 (33.18)