5. Elaine Bouvier is evaluating Nanogen for possible inclusion in a small-cap growth- oriented portfolio. The firm is in the rapidly growing biotech industry and specializes in the nanoparticle delivery of various drug therapies. In light of Nanogen's success with several of its products, Elaine expects the company to have above average growth for the next five years. Listed below are the facts and forecasts she has assembled as of November 23. . . The current market price per share is $57.77 The most recently paid dividend is $0.46. Bouvier forecasts an initial five-year period of 12 percent earnings and dividend growth. Bouvier anticipates that Nanogen can grow at 7.5 percent per year as a mature company, and allows for 10 years to transition to the mature growth period. To estimate the required return on equity using the CAPM, Bouvier recommends a beta of 1.11 for Nanogen, a return on the market portfolio of 9.5 percent and a risk-free rate of 5 percent. Bouvier considers an security trading within a band of + 20 percent of her estimate of intrinsic value to be within a "fair value range." . . A. Estimate the required rate of return on Nanogen's equity using the CAPM. Note: Use only one decimal place in stating your answer.) (4 Points) B. Estimate the intrinsic value of Nanogen using a three-stage dividend discount model with a linearly declining dividend growth rate in stage 2. (21 Points) C. Calculate the percentages of intrinsic value represented by the first stage and by the second stage and by the third stage. (6 Points) D. Is Nanogen undervalued or overvalued from Bouvier's perspective? Explain. (4 Points) 5. Elaine Bouvier is evaluating Nanogen for possible inclusion in a small-cap growth- oriented portfolio. The firm is in the rapidly growing biotech industry and specializes in the nanoparticle delivery of various drug therapies. In light of Nanogen's success with several of its products, Elaine expects the company to have above average growth for the next five years. Listed below are the facts and forecasts she has assembled as of November 23. . . The current market price per share is $57.77 The most recently paid dividend is $0.46. Bouvier forecasts an initial five-year period of 12 percent earnings and dividend growth. Bouvier anticipates that Nanogen can grow at 7.5 percent per year as a mature company, and allows for 10 years to transition to the mature growth period. To estimate the required return on equity using the CAPM, Bouvier recommends a beta of 1.11 for Nanogen, a return on the market portfolio of 9.5 percent and a risk-free rate of 5 percent. Bouvier considers an security trading within a band of + 20 percent of her estimate of intrinsic value to be within a "fair value range." . . A. Estimate the required rate of return on Nanogen's equity using the CAPM. Note: Use only one decimal place in stating your answer.) (4 Points) B. Estimate the intrinsic value of Nanogen using a three-stage dividend discount model with a linearly declining dividend growth rate in stage 2. (21 Points) C. Calculate the percentages of intrinsic value represented by the first stage and by the second stage and by the third stage. (6 Points) D. Is Nanogen undervalued or overvalued from Bouvier's perspective? Explain. (4 Points)
