Stock Valuation
Stock Valuation
Approach: To analyze the given situation we have computed the value of share of stock at current year. Dividend discount model is used to find the current value of stock by discounting all the expected future dividends and future sale price of the share to the present value. To find the present value of the infinite series of future dividends of the stock we used the Gordon Growth Model.
2008 estimation: Based on the previous four years historical values we computed the earnings growth rate for 2008 by taking the average of the previous year’s growth. The estimated growth rate for 2008 is 2% with earnings, dividends, retained earnings, ending book value as 10.7 million dollars, 6.96 million dollars, 3.7 million dollars, 83.7 million dollars respectively. Please refer to the 2008 sheet in the attached xls file for calculations.
Scenario 1 (Rapid Growth Phase): In this phase there is a rapid growth phase with no dividends for four years. To calculate the value of share for year 2007 we have discounted the dividends for future years and for the terminal year (2013) in addition to dividend we added the value of stock in terminal year to account for the perpetuity value of the stock. The growth of rate in dividends (in perpetuity) is calculated as product of return on equity and plowback ratio. The current value of share for this scenario is $121.24 per share.
Scenario 2 (Continuing Normal Growth): In this scenario there is no rapid growth period and the company is growing at current rate of earnings growth with continuing its current dividend policy. Since 2008 onwards we have considered a constant earning growth rate value of 2% as estimated for 2008, so it becomes our terminal year. To calculate the present value of infinite series of future