14 AB D E 2 Q3 3 3 5 As a professional analyst you are responsible for valuing stocks. After gathering data on the Bluth Company you have estimated that its dividend has been growing at a rate of 10% per year. You also estimate that next year's dividend will be $1.45 per share. The stock is currently selling at $98.07 per share, and you believe that an appropriate discount rate is 14%. You expect that the dividend will continue to grow at 10% for the foreseeable future. What is the highest price you would recommend your clients pay to purchase this stock? 7 8 9 10 11 12 13 14 15 15 17 18 19 20 21 Stock Price Next Dividend Growth Rate Required Return Valuation $98.07 $ 1.45 10.0% 14.0% Based on your valuation, would you say the stock is overvalued or undervalued? Overvalued or Undervalued? BE Suppose that after looking at the company more closely you decide that it is getting close to maturity, and you think that the dividend will only grow at 10% for 10 more years. After that you think it will only grow at 4.5%. What is your new valuation? 25 26 022 28 Stock Price Next Dividend Growth Rate 1 Growth Rate 2 Required Return Valuation $98.07 $ 1.45 10.0% 4.5% 14.0% 29 32 33 34 13 36 Directions 02 03 05 Red