Your boss, Sally Maloney of Fred Clark Enterprises (FCE), asked you to help her

Question

Your boss, Sally Maloney of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share.Sall asked a number of security analysts what they believe FCE'S future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis.

Explanation / Answer

The way to solve this in excel: find the PV of the dividend in each year. Year 1 Year 2 Year 3 Year 4 1*1.10 1*1.1^2 1*1.1^3 1*1.1^3 *1.05 To find the terminal value of the growth after year 4 we use the following equation: PV(n-1) = Div1/(Rs-Growth) year 1 year 2 year 3 year 4 CF 1.1 1.21 1.331 1.3975 PV CF1/(1+rs)^1, CF2/(1+rs)^2, CF3/(1+rs)^3, (CF4/(rs-0.05))/(1+rs)^3 Since the price is equal to 15 the sum of the PV values have to add to 15 Set excel to solve for the sum of those functions to be equal to 15 by changing the value of rs. Rs = 0.1297 or ~13%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.