Patricia recently graduated with a degree in business, and her parents have asked her opinion on one of their investment holdings, Enbridge, a multinational energy transportation business.

Enbridges stock price has appreciated 20% over the last two years, and her parents are considering selling it to lock in their profit, however their investment broker believes there is more upside. The broker estimates that based on the companys historical track record and its current project pipeline, Enbridge should continue to increase its dividend by 3% per year for the next 3 years, and then grow its dividend by at least 1.5% per year thereafter. The companys current dividend is $1.50 per share.

The share price is currently $20.50

If Patricias parents have a target rate of return on invested capital of 9%, should she recommend her parents continue to hold or sell their shares in Enbridge? Assuming the brokers forecasts are accurate.

Patricia recalls the 4-step process from her FIN 2500 class, and proceeds to calculate the value of Enbridge shares based on the above information. Use the template below.

STEP #1: Present value of dividends for first 3 years

STEP #2: Calculate P₄ assuming dividends grow at a constant rate of 1.5% indefinitely.

STEP #3: Calculate the present value of P₄ assuming a target return on capital of 9%.

STEP #4: Calculate P₀

PV of dividends for first 3 years at 3% growth (STEP 1)
PV of future share price with 1.5% constant growth (STEP 3)
Estimate of current share valuation (P0)