Question

You are hired to analyze the following company and make a recommendation. Use the dividend discount...

You are hired to analyze the following company and make a recommendation. Use the dividend discount model to explain your answer. Show all your computations. [For the k use 4 decimal points).

MXJ Comp

Earnings growth rate: 12%

Dividends growth rate: -2%

Current annual dividend: $1.95

Actual EPS: $3.25

Market risk premium: 3%

Risk free rate: 1.25%

Beta: 1.40

Current Market Price: $20.70
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Answer #1

Using Dividend discount model, the value of equity is $ 25.65 > Current Market Price ie $ 20.70. As intrinsic value > Current market price, MXJ company's stock is undervalued and hence must be bought for the price appreciation in the future.

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