You were hired as a new analyst to project the value a new firm. Today...
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You were hired as a new analyst to project the value a new firm.
Today is June 2nd 2019. The company just paid an annual dividend yesterday (on June 1st, 2019) of $3.00 per share. You expect the companys dividend to grow at 15% for three years (2020, 2021, 2022). Following this, you expect the company to grow at a 10% rate for three years (2023, 2024, 2025). Finally, you expect the company to grow at a constant rate of 5% thereafter.
The equity beta of the company is 1.5, the risk-free rate is 2% and the expected return to the market is 10%. Assume the CAPM holds.
According to CAPM, what is the appropriate discount rate?
What should the price per share of Lancelot be, according to the dividend discount model? (Hint: what is the present value of the future expected cashflows?)
If the current market value of the Lancelot Company is $65.75, what would you recommend? sell, buy, hold, not enough info?
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