Hanson PLC (LSE:HNS) is selling for GBP472. Hansen has a beta of 0.83 against FTSE 100 index, and the current dividend is GBP 14.50. The risk-free rate of return is 5.00%, the equity risk premium is 4.85%. An analyst covering this stock expects the Hansen dividend to grow initially at 13.5% but to decline linearly to 5.6% over a 10-year. After that, the analyst expects dividends to grow at 5.6%.

(a) Compute the value of Hansen dividend stream using the H-model. According to the H-model valuation, is Hansen overpriced or underpriced?(b) Assume that Hansen's dividends follow the H-model pattern the analyst predicts. If an investor pays the current GPB 4702 price for the stock, what will be the rate of return?

Please find P0 and rate of return on equity, it is a 2-stage H model

Answer:

P0 = 553.47

r = 9.39%

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