Calculate the intrinsic Value of Hunter international.

Value Line has provided the following information on the company, Hunter International:

Dividends
2015	$1.00
2016	$1.13
2017	$1.26
2018	$1.40

Assume the dividend growth rate will be steady beyond 2018. The dividend payout ratio is .52 and the ROE is 16%.

Calculate the long-term growth rate with the formula: g = ROE x b

The estimate of Hunter Internationals Intrinsic Value using the 2018 investment horizon is obtained from the following equation:

V₂₀₁₄ =D₂₀₁₅(1+k)+D₂₀₁₆(1+k)2 +D_20171+k3+ D₂₀₁₈₊P₂₀₁₈(1+k)4

P₂₀₁₈ represents the forecast price at which we can sell our shares of Hunter International at the end of 2018, when dividends enter their constant-growth phase. Calculate that price using the DDM:

P₂₀₁₈₌ D2019k-g=D20181+gk-g=

The only remaining variable remaining to be determined to calculate intrinsic value is the market capitalization rate, k.

Utilize CAPM to derive k. Hunter Internationals beta is 1.20. The risk-free rate on long-term T-bonds in late 2014 was 3%. Suppose that the market risk premium was forecast at 8%, roughly in line with its historical average. This would imply that the forecast for the market return was:

Risk-free rate + Market risk premium = 11%

Therefore, we can solve for the market capitalization rate:

K = rf+beta[E(rm)-rf]

P₂₀₁₈ =? (See equation for P₂₀₁₈ above)

V₂₀₁₄ =? (See equation for V₂₀₁₄ above)

Please explain your answer to the following 2 questions in detail.

1. If the Market Price is at a premium or discount to your intrinsic valuation would you buy or sell the stock?
2. What factors could go wrong in your assessment of the intrinsic value of Hunter International? Explain the flaws that may or may not have distorted your analysis.