Question

Flyers, Inc., reported an EPS of $4.6 this year (t0). Flyers is expected to maintain a retained earnings ratio of 0.5 and ROE of 0.18 for the next four years. After the fourth year, ROE is expected to decrease to 0.05. Applying the cost of equity of 0.11 and the multi-stage growth model, compute the intrinsic price of Flyers.

Answer 1

Year		expected EPS
0	4.6	4.6
1	4.6*1.05	4.83
2	4.6*1.05^2	5.0715
3	4.6*1.05^3	5.325075
4	4.6*1.05^4	5.5913288
5	5.591*(1-.05)	5.3117623
terminal value	Expected EPS in year 5/(required rate of equity-growth rate)	5.311/(11%-(-5%))	33.19
Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =18%
1	4.83	4.0932203
2	5.0715	3.6422723
3	5.325075	3.241005
4	5.5913288	2.8839452
	33.19375	17.120967
Intrinsic value of stock	sum of present value of cash flow	30.98