For RBC (Royal Bank of Canada)

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.

Use http://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.

(levered)=(unlevered industry)*(1+(1-tax rate)*debt/ market capitalization)

R(E)=Risk-free rate+(re-levered)*Equity risk premium

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.