Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. smirnoff & co is facing a rapid growth in earn

Smirnoff & Co is facing a rapid growth in earnings and dividends. Management projects that dividends...

Free

70.2K

Verified Solution

Question

Finance

Smirnoff & Co is facing a rapid growth in earnings anddividends. Management projects that dividends will grow at a rateof 12% during year 1, 10% during year 2, and 8% during year 3.

After that growth slows down to a normal rate of 5%. Company'srequired return is 9%. Last dividend paid (Do) was $3.50 pershare.

Find: a. Horizon stock price;

b. Intrinsic stock value today.

c. Is the stock overpriced or underpriced if the market pricetoday is $20 per share? Will an analyst issue a Buy or a Sellsignal to the clients?

Answer & Explanation Solved by verified expert
4.2 Ratings (507 Votes)

Required rate= 9.00%
Year Previous year dividend Dividend growth rate Dividend current year a. Horizon value Total Value Discount factor Discounted value
1 3.5 12.00% 3.92 3.92 1.09 3.5963
2 3.92 10.00% 4.312 4.312 1.1881 3.62932
3 4.312 8.00% 4.65696 a. 122.245 126.90196 1.295029 97.9916
Long term growth rate (given)= 5.00% b. Value of Stock = Sum of discounted value = 105.22
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 3 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor

CMP at 20 is underpriced, analyst should issue a buy
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Smirnoff & Co is facing a rapid growth in earnings anddividends. Management projects that dividends will grow at a rateof 12% during year 1, 10% during year 2, and 8% during year 3.After that growth slows down to a normal rate of 5%. Company'srequired return is 9%. Last dividend paid (Do) was $3.50 pershare.Find: a. Horizon stock price;b. Intrinsic stock value today.c. Is the stock overpriced or underpriced if the market pricetoday is $20 per share? Will an analyst issue a Buy or a Sellsignal to the clients?

Other questions asked by students

Q

What is the pH of a 0.250 M NaOCl solution? Kb = 3.4 x 10-7

Chemistry
Q

status as their skills constantly was where stone masons gathered shared ideas and relaxed 2A...

Biology
Q

Two pools are being filled with water. To start, the first pool had 819 liters...

Basic Math
Q

Match each scatterplot shown below with the best desciption of its correlation O O B...

Statistics
Q

Fill in the blanks to correctly complete the sentence below The graph of y 2...

Algebra
Q

A student was asked to sketch the graph below Using the graph determine whether each...

Algebra
Q

The following is a partially completed lower section of a departmental expense allocation...

Accounting
Q

case study questions the cotton comapny 1. Identify and discuss the controls for the sales...

Accounting
Q

Required information PR 10-47 (Algo) Comprehensive Problem on Variance Analysis (LO 10-1, 10-3, 10-6) [The...

Accounting
Q

Accounting
Q

The following information pertains to Carson Corp. as of December 31, 2014: Dividends in arrears...

Accounting
Q

Current Attempt in Progress O 57:00 Hide Ti Cheyenne Corporation owns equipment that cost $49,200...

Accounting