Assignment #2 Stock Valuation

Stock: Target

Beta: 1.53

1-year market risk premium: -10.97

Risk Free Rate: 3.68

Last Dividend Paid: 1.08

Annual Expected Growth Rate: 2.68

Required Rate of Return: 20.46

1. Use the Discounted Dividend Model for Constant Growth Stocks and solve for the intrinsic stock price

Based on your above calculations, compare the calculated price with the current market price and indicate whether the stock price is overvalued, undervalued, or at equilibrium? Explain. (For sake of time and ease, just use the annual amount of dividends for D0, (so example .28 x 4 = 1.12) Using annual dividends will match up with our annual figures for R and g.

2. Now, assume that your company has just released a new product and will be experiencing supernormal growth of 25% for the next three years. In Excel, use the information in A and the Discounted Dividend Model for Nonconstant Growth Stocks and solve for the intrinsic stock price