As an analyst for a US domestic equity-income mutual fund, Roberta Kim is evaluating Middlesex Water Company (Nasdaq: MSEX), a publicly traded water utility, for possible inclusion in the approved list of investments. Kim is conducting the analysis in mid-2013. Not all countries have traded water utility stocks. in the United States, about 85 percent of the population gets its water from government entities. A group of investor-owned water utilities, however, also supplies water to the public. With a market capitalization of about $327 million as of mid-2013, MSEX is among the ten largest publicly traded US water utilities. MSex's historical base is the Middlesex System, serving residential, industrial, and commercial customers in a well-developed area of various subsidiaries, MSEX also provides water and wastewater collection and treatment services to areas of southern new Jersey and Delaware. central new Jersey. Through Hampered by a decline in earnings during the recent recession, net income growth during the past five years has been somewhat less than 2 percent. During the last five years, MSEX's return on equity averaged 7.8 percent with relatively little variation, and its profit margins are above industry averages. Because MSEX obtains most of its revenue from the regulated business providing an important staple, water, to a relatively stable population, Kim feels confident in forecasting future earnings and dividend growth. MSEX appears to have a policy of small annual increases in the dividend rate, maintaining an average dividend payout ratio of approximately 80 percent. other facts and forecasts include the following: MSEX's per-share dividends for 2012 (D0) were S0.74. Kim forecasts a long-term earnings growth rate of 3.5 percent per year MSEC's beta is 0.80 based on 60 monthly returns Kim's estimate of MSEX's required return on equity is 7.00 percent. MSEX's current market price is $20.50. 1) Calculate the Gordon growth model estimate of value for MSEX using Kim's required return on equity estimate. 2) State whether MSEX appears to be overvalued, fairly valued, or undervalued based on the Gordon growth model estimate of value. As an analyst for a US domestic equity-income mutual fund, Roberta Kim is evaluating Middlesex Water Company (Nasdaq: MSEX), a publicly traded water utility, for possible inclusion in the approved list of investments. Kim is conducting the analysis in mid-2013. Not all countries have traded water utility stocks. in the United States, about 85 percent of the population gets its water from govermment entities. A group of investor-owned water utilities, however, also supplies water to the public. With a market capitalization of about $327 million as of mid-2013, MSEX is among the ten largest publicly traded US water utilities. MSex's historical base is the Middlesex System, serving residential, industrial, and commercial customers in a well-developed area of central new Jersey. Through various subsidiaries, MSEX also provides water and wastewater collection and treatment services to areas of southern new Jersey and Delaware. Hampered by a decline in earnings during the recent recession, net income growth during the past five years has been somewhat less than 2 percent. During the last five years, MSEX's return on equity averaged 7.8 percent with relatively little variation, and its profit margins are above industry averages. Because MSEX obtains most of its revenue from the regulated business providing an important staple, water, to a relatively stable population, Kim feels confident in forecasting future earnings and dividend growth. MSEX appears to have a policy of small annual increases in the dividend rate, maintaining an average dividend payout ratio of approximately 80 percent. other facts and forecasts include the following: MSEX's per-share dividends for 2012 (DO) were $0.74. .Kim forecasts a long-term earnings growth rate of 3.5 percent per year MSEC's beta is 0.80 based on 60 monthly returns .Kim's estimate of MSEX's required return on equity is 7.00 percent. MSEX's current market price is $20.50. 1) Calculate the Gordon growth model estimate of value for MSEX using Kim's required retum on equity estimate 2) State whether MSEX appears to be overvalued, fairly valued, or undervalued based on the Gordon growth model estimate of value
