P&G

Part IV (40Points): Equity Valuation (2-3pages)We are going to value the stock of the company using the methods learned in class and compare it to the market price(the adjusted closing price on the last trading day of 2019). Please review the entire content on equity valuation before proceeding.i)Use the averaged cost of equityfrom Part III (viii) as the companyscost of equity for the following: Please come up with the valuation of the stock in each of the following three scenarios: 1. Zero-growth dividends: Assume that annual dividends in the future will stay the sameand not grow larger thanthe sum of all quarterly dividends in 2019.2.Constant-growth dividends: please estimate the price of the stock for each of the following possiblegrowth rates of the dividends:1%, 1.5%, 2%, 2.5%, and 3%. Which constant growth rateyields the valuation that is closest to the market price?3.Non-constant growth dividends: Assume that dividends will grow at the rate calculated in Part III(iii)for the next two years and then come down to a lower growth rate,thereafter.Estimate the price in each of the two possible second-stage growth rates: 2% or 2.5%.In which scenario is the price you calculated closest to the market price? Which scenario do you think is most applicablefor the company?ii)Suppose that the stock market is less than perfectly efficient (that is, the stock price that is quotedin the marketcan be incorrect and poorly reflects the true value of the company). Youthink that the constant growth rate model provides a good framework for this companyand that the correct growth rate isprobablycloser to2%. If so, do you suspect overvaluationorundervaluation in stocks by the market? What if you think the correct growth rate isactually closer to2.5%? Please explain your findings in 2-3 sentences.iii)Suppose now that the stock market is quite efficient (that is, the stocks market price is generally correct and reflects almost all the information onthe true value of the company). Suppose that you believe the companyprobably fits best as a constant-growth company, and you established your belief, after a thorough examination of the company, that the constant growth rate most sensiblefor the company is 2%. However, you acknowledge that the estimation of the cost of equity is more susceptible to errors. Therefore, you decide to back out the cost of equity given the stocks market price, assuming theconstant growth rate of dividend of 2% in the future, and the recent dividend history. (That is, you decide to ignore the cost of equity that you calculated in Part III).What is thecost of equity estimated this way? That is, what is therequired rate of return by the investorsin the market, given the assumptions?**I suggest that you try and use the Excel to guess the value of cost of equity that can get you closest to the market price of the stock.