Question

Use the information below and the CD&E model to determine whether Standex is over or under valued if its trading at $79.41 N+1 NN-1N-2N-3 EPS Dividend0.82 DPO ROE Beta P/E 0.130.130.12 0.15 19.717.2 16.7

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Answer #1
We will compare the price by 2 methods- Earnings method and dividend method
Earnings methods
Using P/E ratio
P/E growth rate-
N-1 N-2 N-3
P/E 19.7 17.2 16.7
Growth rate 8.61%
P/E for N           21.40
P/E for N+1           23.24
EPS for N+1 6.05
P/E*EPS         140.60
Estimated share price         140.60
CMP           79.41
Conclusion Share is undervalued
Dividend method
Using Gordon growth model
ROE= 15%
Dividend growth rate-
N-1 N-2 N-3
Dividend payout 0.13 0.13 0.12
Growth rate 4.08%
Since we don’t know the earnings in past 3 periods, we will consider that the growth is dividend payout ratio is the growth in dividend as well
Price= D1/(r-g)
=0.82/(15%-4.08%)              7.51
CMP           79.41
Conclusion Share is overvalued
Note- the resulting share prices are extreme in value. This is not the case in real markets
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