Question
On January 1, 2016, John Smith started to work as a financial analyst in the equity department of theTraveler Mutual Funds. As an entry level
On January 1, 2016, John Smith started to work as a financial analyst in the equity department of theTraveler Mutual Funds. As an entry level financial analyst, his job is to help value the stocks assignedby the fund manager, Ben Ashford. On March 19, a news about Ford Motor Company caught Mr.Ashfords eyes. Fords redesigned F-150 won top consumer reports honor. This is Fords first win inthe category since 1999 and its first overall top pick honor since 2012. Also, the low oil price andfavorable car loans have boosted car sales in U.S. Mr. Ashford is considering whether Traveler shouldincrease the holding of Ford. Hence, Mr. Ashford would like John to analyze the intrinsic(fundamental) value of Fords stock to help him decide whether the fund should buy Fords stocksmore.John recalled that he had learned the dividend growth model in his finance course to estimate theintrinsic value of a stock. To implement the dividend growth model, he first needed to know thecurrent dividend payment of Ford. Second, he needed to estimate the growth rate of dividends forever.Finally, he needed to estimate the required rate of return of the stock based on the risk level of thestock.
John next finished the following jobs:
1. Browsed Yahoo Finance and found the symbol for Fords stock. 2. On Yahoo Finance, John checked Fords dividend payment for the first quarter of 2016 andassume that the dividend payments will stay the same for the remaining three quarters
3. On Yahoo Finance, John checked Growth Est under Analyst Estimates. He thought that thegrowth rate for past and next 5 years for Ford could help him estimate the growth rate of dividendsforever.
4. Based on the risk level of Fords stock, he estimated the required rate of return of the stock wasaround 15%.
5. Based on the estimates he obtained from 2 through 4, John input the estimates to the dividendgrowth model to estimate the intrinsic value of the Fords stock.
6. Since John knew that the estimated intrinsic value of a stock based on the dividend growth modelis very sensitive to the estimated growth rate of dividends. Hence, he did the sensitivity analysisto see how the intrinsic value will be if the estimated growth rate changes.
Use the Dividend Growth Model (DGM) to Value Ford's Stock in 2016 | |
Input Variables for DGM: | |
Dividend paid in 2016 | |
Estimated dividend growth rate forever | |
Required rate of return | |
Fundamental value of the stock in 2016 | |
Sensitivity Analysis: | |
Estimated dividend growth rate | Stock Value |
-1.50% | |
-1.00% | |
-0.50% | |
0.00% | |
0.50% | |
1.00% | |
1.50% | |
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