Question
Using a dividend discount model, determine whether the publicly traded common stock of Oracle Corp. (ORCL) is currently undervalued or overvalued. State the amount in
Using a dividend discount model, determine whether the publicly traded common stock of Oracle Corp. (ORCL) is currently undervalued or overvalued. State the amount in dollar terms. Assume that in the first full year you will receive a dividend of $0.96 per share (the amount of the dividend in its most recently completed fiscal year) and that you will sell the stock in three years at a price equal to 110% of the average 12-month price target for Oracle Corp.s common stock found on Nasdaqs website. You will receive a dividend for each of the three years prior to selling the stock at the end of year three. For purposes of your answer: Access the current consensus projections of earnings per share for Oracle Corp. through Nasdaqs website and assume that its annual dividend for years two and three will grow at the same rate (for example, if the projected increase from 2020 to 2021 is 5%, apply that same rate of growth to the first years dividend to arrive at the estimate of the dividend in year two). Use the capital asset pricing model to determine the required rate of return. To determine CAPM (i) search online for a beta for Oracle Corps common stock and cite the source of your beta data, (ii) select a risk-free rate of return best suited for the investment horizon and (iii) assume an expected broad equity market return of 11%.
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