Celestila Moonn, an UMB MBA student was doing her second internship as an equity analyst at SchoolStreet. Moonn was assigned a task of developing mean return estimates for 20 stocks as preparation for a portfolio optimization.

Task -1: UMA Corporation

The current dividend of $2.30 is expected to grow at 6 percent indefinitely and the required rate of return on the stock is 13 percent. The current price of the UMA stock is trading at $50. Moon was wondering what constant dividend growth rate that would be required to justify the current market price of $50.

Task -2: UML, Inc.

UML just paid a dividend of $5.00 and the dividend expected to grow 20 percent next three years and then decline to a constant rate of 7 percent indefinitely. Moonn wants to use the Gordon Growth model to value UML, however, she was not sure whether this future dividend stream needs to be discounted back to find the value of UML stock. Moon used the Capital Asset Pricing model to calculate the required rate of return of 17%.

Task -3:

UML signs a new distribution agreement with a UMD and just announced the new marketing and distributing agreement to sell its products in Canada; several analysts revised their 2016 outlook for UML Reflecting the new agreement, the current consensus 2016 earnings per share is $2.19 and the current consensus 12-month target share price is $59.00.

Moon observes that UMLs share price rose from $25.00 to $37.00 after the new agreement was announced. He believes that UMLs required rate of return, cost of equity, is 13.5 percent.

Moon calculated the net present value of growth opportunities (NPVGO) that reflected in SchoolStreets share price after the agreement was announced close to.

A.

$20.78

B.

$59.48

C.

$39.19