FNCE 4500 Ch.4: Individual homework 3 Margot lason is an investment analyst who focuses on dividend-paying stocks. lason uses a DCF approach to stock selection. She is meetine with her staff to evaluate portfolio haldings based on a bottom-up screening of stocks listed in the United States and Canada. lasen and her staff begin by reviewing the characteristics of the following portolib candidates. Compaery Venus A Canadian company in the consumer staples sector wath a required rate of return of 7.35\%. The company's current annual dividend of CSO 65 per share alli gow 35% a rear indefinitely. Company Mercury A mid-siaed uS company in the utilties sector with a requined rate of neturn of 10k. lason and her team believe that because of a recent restructuring, the company is unlaely to pay dividends for the next three years. The team expects Mercary to pay an annoal bividend of USS1. n per share beginning four vears frem now, however. Thereaftet, the dividend is eopected so grow indefiritely at ak even though the current price implies a growth rate of 6x during this same period. Company Jupiter A large US company in the telecom sector with a required rate of return of 8. The stock is currently trading at U5\$32.76 per share with an earnings growth rate of 5.3%. lason believes that because Jupiter is mature and has a stable capital structure, the compuny will gow at its sustainable growth rate. Over the past to vears, the company's return on equity (ROC) has avernged 817h and ies payout ratio has averaged 40%. Recently, the company paid an annual dividend of usso s4 per share. Jason asks a newly hired analyst, Jikan Thomas, to comment on the ewaluation approach for these three stocks, Thomas makes the followine statements: - Statement 1. A free cash flow valuation model would not be apprepriate to evaluate Company Werus if the tirm becomes a takeover candidace. - Statement 2. A dividend discount model cannot be apolied to Compary Mercury if dividends are suspended for a lew years. - Statement 3. A dividend discount model is sumble lor evoluabing the stock of Company Jupiter because of the historically consistent payout rane. Jason then asks the team to examine the frowth opportunithes of three Canadian stocks currently held in the portiolio. These stocks are listed in Exhibit 1. Jason believes that the shocks are fairfy valued. Exhibit 1 Selected Stock Charactertics 1. Which of the statements made by Thomas is correct? Explain in detall. (2 pt) 2. Jason and her team estimate that the current value of Company Mercury would be 12 pt) 3. If the team uses the dividend discount modet, the current intrituic value of Compary Y2 stock would be [2 pts] 4. Calculate the suitable growth rate of Jupiter and calculate the current value of fupiter using the calculated growth rate. Determine if the stock is overvalued or undervalued. (2 pts) 5. Calculate the present value of growth opportunities (PNCO) of Himalia, Chaldene and isonoe. Please refer to the Exhibit 1.12 pts) Himalia: Chaldene: isonoe
