Question

# Phoenix industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today,...

Phoenix industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a \$1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by \$1 a year for another two years (the dividend in year 2 will be \$2 and the dividend in year 3 will be \$3). After the third year (in which dividends are \$3 per share) dividend growth is expected to settle down to a more moderate long-term growth rate of 6%. Assume that the firm’s investors expect to earn a return of 14% on this stock.

What is the terminal price of the Phoenix industries at the end of year 3, that is, what is P3 ?

What is the intrinsic value of the Phoenix industries’ stock, that is, what is P0 ?

If the current price of the stock in the market is \$18 per share, the Phoenix industries’ stock is (compared to its intrinsic value)

#### Homework Answers

Answer #1
 Required rate= 14.00% Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 0 0.00% 1 1 1.14 0.8772 2 1 0.00% 2 2 1.2996 1.53894 3 2 0.00% 3 39.75 42.75 1.481544 28.85503 Long term growth rate (given)= 6.00% Intrinsic value= Sum of discounted value = 31.27
 Where Total value = Dividend + Terminal value (only for last year) Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate) Discount factor=(1+ Required rate)^corresponding period Discounted value=total value/discount factor

Market price is underpriced compared to intrinsic value

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