3. Inter will have year-end earning (Ei) of 85 per share and pay out $2 as divid

Question

3. Inter will have year-end earning (Ei) of 85 per share and pay out $2 as dividend. The growth rate of Intel g = 12% and the discount rate k 12.5%, AMD has the same earnings and discount rate as Intel, but its growth rate is 6%. (a) What's the fair market value for Intel and AMD respectively? (b) What is the present value of growth opportunity (PVGO) for Intel and AMD? (c) Would shareholders be better off if AMD decides to abandon the growth strategy and pay out all earnings as dividends to shareholders? Show results and explain? (d) Assume that Intel is fairly valued, if you invest in it, what is your return after one year?

Explanation / Answer

Intel AMD E1 5 5 D0 2 2 g 12% 6% k 12.50% 12.50% a P0=D0*(1+g)/(ke-g) =2*(1+.12)/(.125-.12) =2*(1+.06)/(.125-.06) Price of Share 448                                        33 b PV of the perpetuity=c/r =.12/.125 =.06/.125 96% 48% c No if the compay has opprtunity to expand than it better to use the internal accruals for expansion rather than distribute as divdend and take the loan from bank as in the long run this will give better growth rate d Invest in Intel will dividend =2*(1+.12)=2.24

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