Elaine Bouvier is evaluating Energen (NYSE: EGN) for possible inclusion in a smallcap growth-oriented portfolio. Headquartered in Alabama, EGN is a diversified energy company involved in oil and gas exploration through its subsidiary, Energen Resources, and in natural gas distribution through its Alabama Gas Corporation subsidiary. In light of EGN’s aggressive program of purchasing oil and gas producing properties, Bouvier expects above average growth for the next five years. Bouvier establishes the following facts and forecasts (as of the beginning of August 2013):

• The current market price is \($56.18\) 

• The current dividend is \($0.56\).

• Bouvier forecasts an initial 5-year period of 11 percent per year earnings and dividend growth.

• Bouvier anticipates that EGN can grow 6.5 percent per year as a mature company, and allows 10 years for the transition to the mature growth period.

• To estimate the required return on equity using the CAPM, Bouvier uses an adjusted beta of 1.2 based on 2 years of weekly observations, an estimated equity risk premium of 4.2 percent, and a risk-free rate based on the 20-year Treasury bond yield of 3 percent.

• Bouvier considers any security trading within a band of ± 20 percent of her estimate of intrinsic value to be within a “fair value range.”

i. Estimate the required return on EGN using the CAPM. (Use only one decimal place in stating the result.)

ii. Estimate the value of EGN using a three-stage dividend discount model with a linearly declining dividend growth rate in Stage 2.

iii. Calculate the percentages of the total value represented by the first stage and by the second and third stages considered as one group.

iv. Judge whether EGN is undervalued or overvalued according to Bouvier’s perspective.

v. Some analysts are forecasting essentially flat EPS and dividends in the second year. Estimate the value of EGN making the assumption that EPS is flat in the second year and that 11 percent growth resumes in the third year.