Question

Thelastest CF per share $1.50 going up by 12%, 14%, 16%, 18% and 20% respectively for the next five years. After that the annual growth is constant at GDP rate of 3%. You have already computed CAPM and the discount rate is established at 10%.

1. The price as of year 6 (P6) is...

2. The price as of year 5 (P5) is...

3. The price as of today is...

4. With 10% margin of error, if the stock is trading at $15 today is this stock a buy, sell or hold?

Answer 1

The CF are as follows

CF1= 1.5*112% = 1.68

CF2 = 1.68*114%= 1.9152

CF3 = 1.9152*116%= 2.221632

CF4= 2.221632*118% = 2.621526

CF5 = 2.621526*120% = 3.145831

CF6= 3.145831*103%= 3.240206

CF7= 3.240206*103% = 3.337412

1: Price at year 6 = CF7/(k-g)

= 3.337412/ (10%-3%)

=47.68

2: Price at year 5= CF6/(k-g)

= 3.240206/ (10%-3%)

=$46.29

3: Price today = CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n+ Pn/(1+r)^n

= 1.68/ 1.1^1 + 1.9152/1.1^2+ 2.221632/1.1^3+ 2.621526/1.1^4+ (3.145831+46.29)/1.1^5

=$37.27

4: If the stock is trading at $15, buy it since it is extremely underpriced.