Question

4) Please solve for the value of the following stocks and briefly explain your results: A)...

4) Please solve for the value of the following stocks and briefly explain your results:

A) Your research on Skyway Corp. indicates that the company will be paying dividends of $1.75 per share in 2021, $1.95 per share in 2022, $2.25 per share in 2023 and $2.65 per share in 2024. You are given an estimate that the stock price in 2024 will be worth $37.50 per share. If your required annual return for all investments is 12%, what is the most you are willing to pay for Skyway stock today?

B) Meltran, Inc. has issued a series of preferred stock that is priced at $80 per share and has a quarterly dividend payable at $0.75 per share. What is the dividend yield of this preferred stock?

C) Tenomar Corp. is about to experience a 5 year restructuring plan and will not pay dividends during that time. However, management promises that this initiative will be so successful that the company can then pay out a $6.75 per share dividend that will then grow at a rate of 10% per year. What is the maximum price you are willing to pay for Tenomar’s stock if your required annual return is 15%?

D) Gibralter, Inc. has just announced EPS of $3.75 and future earnings are expected to grow 20% per year for the foreseeable future. The most recent stock quote for Gibralter indicates that the company is trading at $48.50 as a result of this announcement. What is the PEG for Gibralter and would the stock of this company be worth buying at these levels as the result of your PEG analysis?

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Answer #1

4)A) stock price today means present value of all future cash inflows from stock

Particulars cash flows PVF@12% PV
2021 1.75 0.8929 1.5626
2022 1.95 0.7972 1.5545
2023 2.25 0.7118

1.6016
2024 2.65+37.5 =40.15 0.6355 25.5153
Present worth of share $30.234

B) dividend yield = Annual dividend / current market price

= 0.75 *4 / 80 = 3.75%

C) price of share = D1 / Ke - g

= 6.75 / (15% - 10%) = = $135

D)PEG = PE ratio / earning growth rate

PE ratio. = market price per share/ earnings per share = 48.5 /3.75= 12.93

PEG = 12.93/ 20 = 0.6465

Here PEG < 1, so,stock price is undervalued.

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