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Handout: Equity Valuation

1. The stock price of Lala Land Corp is $158.84 based on a dividend of $5 that is expected to grow 35% annually for 3 years then 25% for 1 year and 4% indefinitely, with a required return of 12%. 2. The current share price of Dreamz Unlimited INC is $58.49 based on dividends expected to grow 29% for 2 years then 6% indefinitely, with a required return of 10% and an initial dividend of $1.50. 3. The intrinsic value of a share of Imaginary Corporation is $126.92 based on a dividend of $9.90 next year growing 5.2% indefinitely and a required return of 13%.

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42 views3 pages

Handout: Equity Valuation

1. The stock price of Lala Land Corp is $158.84 based on a dividend of $5 that is expected to grow 35% annually for 3 years then 25% for 1 year and 4% indefinitely, with a required return of 12%. 2. The current share price of Dreamz Unlimited INC is $58.49 based on dividends expected to grow 29% for 2 years then 6% indefinitely, with a required return of 10% and an initial dividend of $1.50. 3. The intrinsic value of a share of Imaginary Corporation is $126.92 based on a dividend of $9.90 next year growing 5.2% indefinitely and a required return of 13%.

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sam
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© © All Rights Reserved
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Handout

Equity Valuation
1. Lala Land Corp. (LLC) is experiencing super normal growth. Dividends are expected to
grow at 35 percent per year during the next three years, 25 percent over the following
year, and then 4 percent per year indefinitely. The required return on this stock is 12
percent, and the LLC distributed $5/share dividend last year. What is the stock price as
per the Gordon growth model?
D0= $5
D1= 5*1.35=6.75
D2= 6.75*1.35=9.1125
D3= 9.1125*1.35=12.3018
D4=15.377
D5=15.99244
P4=D5/R-G
P4=199.91
P0 = 158.84

D0=5, D2=6.75, D3=12.3018, D4=15.377+199.9=215.28 (Terminal Value)


PV=6.75/(1.12)^1=6.027, PV=9.1125/(1.12)^2=7.264, PV=12.3018/(1.12)^3=8.756,
PV=215.28/(1.12)^4=136.81
Intrinsic Value = $158.86
2. Dreamz Unlimited INC (DU) is growing quickly. Dividends are expected to grow at a 29
percent rate for the next two years, with the growth rate falling off to a constant 6
percent thereafter. If the required return is 10 percent and the company just paid a
$1.50 dividend, what is the current share price?
D0= 1.50
D1= 1.935
D2= 2.49615
D3= 2.645919
P2=2.645919/0.10-0.06
D2+P2= 68.64413
I= 10%
P0= $58.49

3. Imaginary Corporation will pay a $9.90 per share dividend next year. The company
decides to increase its dividend by 5.2 percent per year indefinitely. If you require a 13
percent return on your investment, what is the intrinsic value of the share?
D1: 9.90
P0= 9.90/(0.13-0.052)
P0 = $126.9231
4. Super star INC just paid a dividend of $5.50 per share. The company will increase its
dividend by 50 percent next year and will then reduce its dividend growth rate by 10
percentage points per year until it reaches the industry average of 10 percent dividend
growth, after which the company will keep a constant growth rate forever. If the
required return on Super star stock is 18 percent, what is the intrinsic value of the stock
as per the Dividend discount model?
Growth
1=50%
2=40%
3=30%
4=20%
5=10%
D0= 5.50
D1= 8.25
D2=11.55
D3= 15.015
D4= 18.02
D5= 19.82
P4= 18.02/(0.18-0.10) = 225.25

D1 = 8.25, D2 = 11.25, D3 = 225.25+15.015 = 240.265


PV (240.265(1.18)^3 = 146.233
PV(8.25/(1.18)^1) = 6.99, PV(11.55/(1.18)^2) = 8.295, PV(240.265/(1.18)^3) = 146.232
Intrinsic Value = $161.52

5. A preferred share of LLC pays an annual dividend of 12%. It has a required rate of return
of 9 percent.
What is the value of the preferred share if LLC has issued $100 face value preferred
shares?

Preferred Shares= D/r


Dividend: 12% of $100= $12
12/0.09= $133.33

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