Voittenock corporation (VC) has. Just an annual dividend of $1.10 per share and
ID: 2768818 • Letter: V
Question
Voittenock corporation (VC) has. Just an annual dividend of $1.10 per share and the stock is selling for $24. During the past year, VC 's EPS was $2.40. a. Analyst John expects VC 's dividends to grow 10% annually for the next two years . After two, he expects dividend growth to decline to a long term rate of 3%. John believes the appropriate required return for this stock is 12%. Determine John's intrinsic value estimate for VC shares. b. Analyst Carl believes the appropriate required return for VC is 12%. However , he sees a very different scenario . He expects no dividends to paid during the next two years while EPS grows 15% annually. Carl uses a trailing P/E approach to valuation . He expects the stock to sell at a P/E of 10 at that time. 1 . Derive the expected value of the stock after two years based on Carl assumption 2. Should Carl recommend to purchase the stock? Voittenock corporation (VC) has. Just an annual dividend of $1.10 per share and the stock is selling for $24. During the past year, VC 's EPS was $2.40. a. Analyst John expects VC 's dividends to grow 10% annually for the next two years . After two, he expects dividend growth to decline to a long term rate of 3%. John believes the appropriate required return for this stock is 12%. Determine John's intrinsic value estimate for VC shares. b. Analyst Carl believes the appropriate required return for VC is 12%. However , he sees a very different scenario . He expects no dividends to paid during the next two years while EPS grows 15% annually. Carl uses a trailing P/E approach to valuation . He expects the stock to sell at a P/E of 10 at that time. 1 . Derive the expected value of the stock after two years based on Carl assumption 2. Should Carl recommend to purchase the stock? a. Analyst John expects VC 's dividends to grow 10% annually for the next two years . After two, he expects dividend growth to decline to a long term rate of 3%. John believes the appropriate required return for this stock is 12%. Determine John's intrinsic value estimate for VC shares. b. Analyst Carl believes the appropriate required return for VC is 12%. However , he sees a very different scenario . He expects no dividends to paid during the next two years while EPS grows 15% annually. Carl uses a trailing P/E approach to valuation . He expects the stock to sell at a P/E of 10 at that time. 1 . Derive the expected value of the stock after two years based on Carl assumption 2. Should Carl recommend to purchase the stock?Explanation / Answer
The value of stock after 2 years = P/E RATIO* EPS = 10* 2.4*1.15*1.15 = $31.74
Theoretical value of share at present = 31.74/(1.12*1.12) =25.30
Current actual market price =24
Hence the stock needs to be bought since the stock is under priced.
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