Question

Calculate: 1. Horizon Value 2. Intrinsic Value 3. the expected dividend yield for black sheep's stock today

Black Sheep Broadcasting Company (BSBC) just paid a dividend of $2.88 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Black Sheep's dividend is expected to grow at a constant rate of 4.00% per year. Complete the following table, assuming that the market is in equilibrium, and: The risk-free rate (rRF) is 5.00% The market risk premium (RPM) is 6.00%, and Black Sheep's beta is 0.90

Answer 1

Required return of stock, RR = Rf + Beta * RPm = 5% +0.90 * 6% = 5% + 5.4% = 10.4% Just paid dividend DO = $2.88 Growth rate, g = 20% for next year and thereafter 4% per year forever D1 = DO*(1+g) = $2.88 * (1 + 20%) = $3.456 D2 = $3.456 * (1 + 4%) = $3.59424 Terminal value of stock at the end of year 1, P1 = D2 / (RR - g) = $3.5924 / (10.4% -4%) = $56.16 Per share Current price of stock, PO = D1 +P1) * PVIF(RR. 1) = ($3.456 + $56.16) * PVIF(10.4%, 1) = $59.616 * 0.9058 = $54.0001728 = $54 Per share (Rounded) Ans: 1) Horizon value = $56.16 Per share 2) Intrinsic value = $54 Per share 3) Expected dividend yield = D1 /PO = $3.456/S54 = 0.064 = 6.4 %