sok evaluation: lavestors are evaluating new stock offering by Ocean Blue Restau
ID: 2787475 • Letter: S
Question
sok evaluation: lavestors are evaluating new stock offering by Ocean Blue Restauraet, which was opes recently in Utica. The investor was informed that the most recent dividend (D0) paid by the restaurant is $1.00 per share, lavestors also determined that the required return for this business is 12%. After some research, investor decides that the dividend is expected to grow at a constant speed at 7% per year forever. Based on this assumption, please calculate the fair valee of the stock (4 points) 1Q. Stock Evaleation: Similar as the question above, investors are evaluating a ne stock offering by Utica Nano, which was open recently in Utica. The investor was informed that the most recent dividend (D0) paid by the restaurant is $1.00 per share. lnvestors also determined that the required return for this business is 12%. Investor believes that Utica Nano should experience non constant growth 30% in year 1 and 20% for year 2. After that, the business is expected to grow atacoastant speed at 8% forever. Calalate the expected dividend for year 1, 2, and 3' respectively. (4 points) b. Which year is your terminal date? Please calculate the expected terminal vale for this stock (2 points) c Please find the fair stock value if the above assumption is right. (2 points)Explanation / Answer
1
Price=D1/(r-g) where D1 is next dividend, r is return on equity and g is growth rate
D1=1*1.07=1.07
Hence, price=1.07/(12%-7%)=$21.4
2
D1=1*(1+30%)=$1.3
D2=1.3*(1+20%)=$1.56
D3=1.56*(1+8%)=$1.6848
Price=1.3/1.12+1.56/1.12^2+Terminal value/1.12^2
Terminal value=D3/(r-g)=1.6848/(0.12-0.08)=42.12
So, Price or fair value=1.3/1.12+1.56/1.12^2+42.12/1.12^2=$35.982143
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