Question
Choose one of the blue chip (established) companies that pay dividends. Please do not choose firms that fall into one of the following categories: Financial
Choose one of the blue chip (established) companies that pay dividends. Please do not choose firms that fall into one of the following categories:
Financial service firms, companies with large capital arms (GE, automobile), REITs
Firms with negative earnings
Firms that do not pay dividends
Unlevered (all equity) firms
Blackberry, Pfizer, Suncor, VF Corp, Empire Company, Shaw Communications, Potash
Download the companys annual report from its website or SEDAR (System for Electronic Document Analysis and Retrieval) for Canadian firms or EDGAR (Electronic Data Gathering, Analysis, and Retrieval) for the U.S. firms. Print out pages that contain Income Statement, Balance Sheet and Statement of Cash Flows.
Your goal is to estimate its share price using the two-stage dividend discount model.
You need six inputs to estimate the stock price:
risk-free rate
equity risk premium
growth rate for short term (year 1 year 5)
long term (terminal) growth rate (5 years or more)
dividend at time T=1
discount rate
1. Risk-free rate
Risk-free rate is rate of return on 10-year government bonds (in the U.S. and Canada). Look it up in Yahoo!Finance or any other online source.
2. Equity risk premium.
Use historical equity risk premium of 6 percent.
3. Short-term growth rate
- report historical growth rate and sustainable growth rate. Justify your choice.
4. Long-term growth rate
- use the lower of the short-term growth rate from part 3 or risk-free rate.
5. Future dividends.
- Future dividends are estimated based on past dividends using growth rates from parts 3-4. Please note that dividends are paid quarterly, so you may need to add quarterly numbers to obtain annual dividend. Look up data on last year dividend payment in annual report.
6. Discount rate.
Usehttp://pages.stern.nyu.edu/~adamodar/, Updated Data, Betas by Sector (US) to obtain average unlevered beta by industry. Relever beta using company-level data, then estimate cost of equity capital.
Calculate stock price using two-stage dividend discount model.
Compare your estimate with the actual stock price and report your finding. Indicate whether the stock is overpriced, underpriced or fairly valued. If you find that it is underpriced or fairly valued, keep it in your Investopedia portfolio. If it is overpriced, sell it off.
Your deliverable should be no longer than one pages. Make sure you show all your work and formulas that you use.
Please do not forget to indicate which company you chose.
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