Simon is an equity analyst. He is now analysing a vacuum cleaner company called Wesuck. The stock of Wesuck is currently selling for $50 per share. Wesuck has just paid a cash dividend of $1. Simon estimates that the dividend will grow at a rate of 6% in the coming 2 years, then stop growing thereafter. The dividends are paid once every year. The market required rate of return of Wesuck is flat at 4% for all tenors.

a)Calculate the current intrinsic value of Wesuck by Dividend Discount Model (DDM). (6 marks)

b)It is projected that the earning of Wesuck in next year will be $2. Using the intrinsic value from part (a), calculate the present value of growth opportunities (PVGO) of Wesuck. (4 marks)

c)Simon sees a big different in the intrinsic value and the market value of the stock. Is the market crazy? What reasons may lead to such big difference in Simon's analysis? (3 marks)