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Below you see forecasted EPS for F&H industries. The company maintains a 25% dividend payout rate. You estimate the cost of equity to be 12%.

Below you see forecasted EPS for F&H industries. The company maintains a 25% dividend payout rate. You estimate the cost of equity to be 12%. The current stock price of the company is $21.

A. Compute the intrinsic value of the stock based on the dividend discount model, assuming that after year 7 the company will enter a sustained growth period with g=5%.

B. Is the stock over- or undervalued? What would you recommend to a potential investor?

C. What if in fact the appropriate discount rate r was not 12%? Pick a LOWER discout rate and explain how it would change your estimated intrinsic value (i.e. recalculate the intrinsic stock price)? What would you recommend then?

Forecasted EPS for F&H Industries
Year 1 2 3 4 5 6 7
Earnings Per Share $ 5.23 $ 6.28 $ 7.41 $ 8.59 $ 9.79 $ 10.87 $ 11.00

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