Question

BT Alex Brown Analysts are evaluating Energen (NYSE: EGN) for possible inclusion in a small-cap oriented portfolio. EGN is a diversified energy company involved in oil & gas products. As a result of EGN’s aggressive program of purchasing oil and gas producing properties, BT Alex Brown expects above-average growth for the next five years. The analysts establish the following facts and forecasts for EGN:

• Current market price is $20
• Current dividends are $0.54
• Required return on equity is 11%
• Initial 2-year period of 15% per year earnings and dividend growth

Which of the following is closest to the present value of dividends for the first-two years?

		$0.62
		$0.71
		$1.14
		$1.34

Answer 1

D0 = 0.54

Growth Rate = 15%

D1 = 0.54(1+0.15) = 0.621

D2 = 0.621(1+0.15) = 0.71415

Present Value =

=

= 0.55945945945 + 0.57962016069

= 1.13907962014 OR 1.14

Option C is correct.

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