Tyler Inc.\'s most recent annual dividend was $3.55 a share. The firm has been g
ID: 2765747 • Letter: T
Question
Tyler Inc.'s most recent annual dividend was $3.55 a share. The firm has been growing at a consistent 4% rate for several years, but analysts generally believe that better times are ahead, and that future growth will be in the neighborhood of 5%. The stock is currently selling for $75. Stocks similar to Tyler earn returns ranging from 8% to 10%. a. Calculate values for a share of Tyler at interest rates of 8%, 9%, and 10%. b. Do you think Tyler is a good investment for the long run, that is, for someone planning to hold onto it for ten or more years? c. Do you think it's a good investment for the short term? That is, should you buy it with the expectation of selling in a relatively short period, say a year or less? d. Repeat the calculations of part a assuming that instead of rising, Tyler's growth rate (1) remains at 4% or (2) declines to 3%. e. Comment on the range of prices that you've calculated.
Explanation / Answer
a.
P0 = D0*(1+g)/(k-g) = $3.55*(1.05)/(k-0.5) = 3.73/(k-0.5)
K Po
8% $124.33
9% $93.25
10% $74.60
b. Tyler would appear to be a good investment based on figures in part a. The stock is prices at the low end of a range of reasonable values. This implies that, barring a major unforeseen problem, it should move generally upward over the next several years.
c.tyler's value is not so clear in short run, beacuse we cannot say how long will it take for market to recognise it's intrimsic bvalue and bid price up
d
e. It’s important to understand how sensitive the model results are to change in the assumptions about return and growth rate. Whether the stock is a good buy at $75 boils down to how good we feel about those rates. Notice that the rates in all calculations seem reasonable but result in a range of values from about $52 to $123 , a wide spread indeed.
g k P0 1 4% 8% $92.25 4% 9% $73.80 4% 10% $61.50 2 3% 8% $ 73.20 3% 9% $ 61.00 3% 10% $ 52.29Related Questions
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