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18 B D E E F H 1 01 Dividend discount model 2 Below you see forecasted EPS for F&H industries The company maintains a 35% dividend payout ratio. You estimate the cost of equity to be 129 The current stock price of the company is $70. A. Compute the intrinsic value of the stock based on the dividend discount model, assuming that after years the company will entera sustained growth period with g=3%. B. Now compute the intrinsic value of the stock where the terminal value is estimated using market comparable. You assume that the comparable companies will have a trailing P/E ratio of 10 in year 5. C. is the stock over or undervalued? What would you recommend to a potential investor? D. What if in fact the appropriate discount rater was not 12%? Pick a different discout rate and explain how it would change your estimated 3 intrinsic value? What would you recommend then? 6 Forecasted FPS for FH Industries 7 Year 8 Earnings Per Share 9 10 1 2 3 4 5 $ 5.23 $ 6.28 $ 7.41 $ 8.59 $ 9.79 12 A. Terminal value approach 13 14 Price 15 16 B. P/E approach 17 P/E 18 19 Price 20 21 C. Recommendation 23 24 D. Change in discount rate analysis 25 Different rate chosen 21 23 29 31 37 34 35