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FNCE 4500 Ch.4: individual homework 3 Margot lasen is an imvestment andiyst who locuses on dividend-paping ghocks. Jason uses a DCF approach to stock selection. She is meetine with her staff to evaluate portiolio holdings based on a botsom-up screening of stocks listed in the United States and Canada. Jasson and her staff begin by reviewing the characteriatics of the following portfolio candidates. Company Venus A Canadian company in the consumer staples sector with a required rate of treturn of 7.35%. The company's current annual dividend of CS0.65 per share will grow 3.5% a vear indefinitely. Company Mercury A mid-sited us company in the utilties sector with a required rate of return of 10k. lason and her team believe that because of a recent restructurine, the company is unlikely to pay dividends for the noct theee vears. The team expects Mercury to pay an annual dividend of US\$ 1.72 per share beginning four vears from now, however, Thereaftes, the dividend is expected to grow indefinitely at 4K, even thouph the current price implies a growth rate of 6N during this same period. Company lupiter A large US company in the telecom sector with a required rate of return of ax. The stock is currently trading at US\$32.76 per share with an earnings growth rate of 5.3K. Jason believes that because lupiter is mature and has a stable capitai structure, the company will grow at its sustainable growth rate. Over the past 10 years, the company's retum on equity (ROE) has averaged 8.17m and ats parout ratio has averaged 40%. Recently, the company paid an annual dividend of usso st per share. Jason asks a newly hired analyst, Jhan Thomas, to comment on the evaluation approach for these three stock. Thomas makes the following statements: - Statement 1. A free cash flow valuation model would not be appropriante to evaluate Company Venus if the firm becomes a takeover candidate. - Statement 2. A dividend discount model cannot be applied to Combany Mercury if dividends are suspended for a few yeacs. - Statement 3. A dividend discount modet is suitable for evaluating the stock of Company lupiter because of the historically consistent parpout ratio. Jason then asks the team to eamine the growth opportunities of three Canadian stocks currenty heid in the portloilo. These stecks are listed in Exhibil 1. Jason believes that the stocks are faifly ralund. Exhibit 1 Selected Stock Characteristics 1. Which of the statements made by Thomas is correct? Explain in detall. (2.pt) 2. Lasan and her team estimate that the current value of Company Mertury would be Q ot 1. If the team usei the dividend discount model, the current intrimic value of Company Venus atock would be (2 pta) 4. Calculate the suitable growth nate of lopiter and calculate the current value of fupher usine the calculated growth rate. Determine if the stock is evervalued er undervalued. 12 pts) 5. Calculate the present value of erowth epportunities {Pv GOJ of Himalia, Chaldene and lsonoe. Fioase refer to the Exhibit 1. [2 pts] Himala: Chaldene: bonoe