6. In the text, we discussed using the discounted dividend model to estimate a stock's intrinsic value. To keep things as simple as possible, let's assume at first that XOM's dividend is expected to grow at a constant rate of 5% annually over time. So, g-5%. If so, the intrinsic value equals D/(r.-g), where D, is the expected annual dividend 1 year from now, r, is the stock's required rate of return, and g is the dividend's constant growth rate. Go back to the summary (overview) screen and find XOM's current dividend. Multiply this dividend by 1 + g to arrive at an estimate of D. a. Dividend Yield = 3.61% b. .0361(1+.05)= 0.037905 or 3.6905% 7. The required return on equity,r,, is the final input needed to estimate intrinsic value. For our purposes, you can assume a number (say, 9% or 10%) or you can use the CAPM to calculate an estimate of the cost of equity, using the data available on the Internet. (For more details, look at the Taking a Closer Look exercise for Chapter 8.) Having decided on your best estimates for D, r, and g, you can calculate XOM's intrinsic value. Be careful to make sure that the long-run growth rate is less than the required rate of return. How does this estimate compare with the current stock price? Does your preliminary analysis suggest that XOM is undervalued or overvalued? Explain. a. 8. It is often useful to perform a sensitivity analysis, where you show how your estimate of intrinsic value varies according to different estimates of D, r, and g. To do so, recalculate your intrinsic value estimate for a range of different estimates for each of these key inputs. One convenient way to do this is to set up a simple data table in Excel. On the basis of this analysis, what inputs justify the current stock price? a. 6. In the text, we discussed using the discounted dividend model to estimate a stock's intrinsic value. To keep things as simple as possible, let's assume at first that XOM's dividend is expected to grow at a constant rate of 5% annually over time. So, g-5%. If so, the intrinsic value equals D/(r.-g), where D, is the expected annual dividend 1 year from now, r, is the stock's required rate of return, and g is the dividend's constant growth rate. Go back to the summary (overview) screen and find XOM's current dividend. Multiply this dividend by 1 + g to arrive at an estimate of D. a. Dividend Yield = 3.61% b. .0361(1+.05)= 0.037905 or 3.6905% 7. The required return on equity,r,, is the final input needed to estimate intrinsic value. For our purposes, you can assume a number (say, 9% or 10%) or you can use the CAPM to calculate an estimate of the cost of equity, using the data available on the Internet. (For more details, look at the Taking a Closer Look exercise for Chapter 8.) Having decided on your best estimates for D, r, and g, you can calculate XOM's intrinsic value. Be careful to make sure that the long-run growth rate is less than the required rate of return. How does this estimate compare with the current stock price? Does your preliminary analysis suggest that XOM is undervalued or overvalued? Explain. a. 8. It is often useful to perform a sensitivity analysis, where you show how your estimate of intrinsic value varies according to different estimates of D, r, and g. To do so, recalculate your intrinsic value estimate for a range of different estimates for each of these key inputs. One convenient way to do this is to set up a simple data table in Excel. On the basis of this analysis, what inputs justify the current stock price? a
