Answer:
Explanation:
From the given information:
The current price =
2. The value of the stock
Calculate the earnings at the end of 5 years:
Terminal value year 5 =
![=\dfrac{\$2.51763\times (1+0.04516)}{8\%-0.04516}](https://tex.z-dn.net/?f=%3D%5Cdfrac%7B%5C%242.51763%5Ctimes%20%281%2B0.04516%29%7D%7B8%5C%25-0.04516%7D)
=$75.526
Discount all potential future cash flows as follows to determine the stock's value:
![\text{Value of stock today} =\bigg( \sum \limits ^{\text{no of years}}_{year =1} \dfrac{Dividend (D_o) \times 1 +Growth rate ) ^{\text{no of years}}}{(1+ interest rate )^{no\ of\ years} }](https://tex.z-dn.net/?f=%5Ctext%7BValue%20of%20stock%20today%7D%20%3D%5Cbigg%28%20%5Csum%20%5Climits%20%5E%7B%5Ctext%7Bno%20of%20years%7D%7D_%7Byear%20%3D1%7D%20%5Cdfrac%7BDividend%20%28D_o%29%20%5Ctimes%201%20%2BGrowth%20rate%20%29%20%5E%7B%5Ctext%7Bno%20of%20years%7D%7D%7D%7B%281%2B%20interest%20rate%20%29%5E%7Bno%5C%20of%5C%20years%7D%20%7D)
=$ 54.1945
As a result, the analysts value the stock at $54.20, which is below their own estimates.
3. The value of the stock
Calculate the earnings at the end of 5 years:
Terminal value year 5 =
![=\dfrac{\$2.51763\times (1+ 7 \%) \times 20\%}{8\%-7\%}](https://tex.z-dn.net/?f=%3D%5Cdfrac%7B%5C%242.51763%5Ctimes%20%281%2B%207%20%5C%25%29%20%5Ctimes%2020%5C%25%7D%7B8%5C%25-7%5C%25%7D)
=$53.8773
Discount all potential cash flows as follows to determine the stock's value:
=$39.460
As a result, the price is $39.460, and the other strategy would raise the value of the shareholders. Not this one, since paying a 100% dividend would result in a price of $54.20, which is higher than the current price.
Notice that the third question depicts the situation after 5 years, but the final decision will be the same since we are discounting in current terms. If compounding is used, the future value over 5 years is just the same as the first choice, which is the better option.
The presumption in the second portion is that after 5 years, the steady growth rate would be the same as measured in the first part (1).