Question 3 (25 marks) Suppose you gathered the following information regarding Beta Corp: Current year (2015) EPS = $4 Plowback ratio = 0.4 Required return = 12% Current stock price = $50 Dividend growth rate in the foreseeable future = 5% (a) Given that dividends are paid out at the end of year, i) Estimate intrinsic value of the company's stock at end of 2015. (3 marks) ii) Comment on whether the company is currently over-valued, under-valued or fairly valued (4 marks) iii) Estimate present value of growth opportunities (PVGO) (4 marks) iv) Estimate the fraction (percentage) of the company's leading P/E ratio that comes from PVGO (2 marks) (b) Besides the method in (a), estimate the P/E of the company's stock using: i) Justified/theoretical trailing P/E (2 marks) ii) Trailing P/E based on market price (2 marks) iii) Comment on whether the company is currently over-valued, under-valued or fairly valued (2 marks) (c) What types of valuation models are used in (a) and (b) respectively? (2 marks) (d) Suppose Beta Corp has never paid out any dividend. i) Based on the valuation model in (a), what other cash flows would you be using in valuing the company's stock? (2 marks) ii) What required rates of return should be used for the two types of cash flows respectively? (2 marks)