Pacific Healthcare is an investor-owned hospital chain. Pacific’s stock is currently selling for $8 per share,...
Pacific Healthcare is an investor-owned hospital chain. Pacific’s stock is currently selling for $8 per share, current dividend is $0.48 per share (paid on December 31, 2019), and the beta coefficient is 1.2. In addition, you learn that the yield on long-term Treasury bonds is 5.0 percent and that a market return of 11 percent is expected. Most analysts forecast that Pacific will grow about 10 percent per year for the next five years (2020-2024) and 4 percent per year thereafter (2025 and beyond). Based on these growth forecasts, you assembled the forecast dividends per share, as shown in the below exhibit. -
Year/Dividend: 2019/$0.480; 2020/$0.528; 2021/$0.581; 2022/$0.639; 2023/$0.703; 2024/$0.773; 2025/$0.804; 2026/$0.836
Excel Problem (Answers to highlighted cells): What is the estimated value on December 31, 2020, 2021, 2022, 2023, and 2024, assuming the stock is in equilibrium?
| Estimated 2020-2024 value of Pacific Healthcare stock: | ||||||
| 2021 | 2022 | 2023 | 2024 | PV | ||
| Year 2-5 dividends | $0.58 | $0.64 | $0.70 | $0.77 | ||
| Year 6+ dividends | ||||||
| Estimated value on December 31, 2020 | ||||||
| 2022 | 2023 | 2024 | PV | |||
| Year 3-5 dividends | $0.64 | $0.70 | $0.77 | |||
| Year 6+ dividends | ||||||
| Estimated value on December 31, 2021 | ||||||
Homework Answers
| Estimated 2020-2024 value of Pacific Healthcare stock: | ||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | PV | |
| Year 2-5 dividends | $ 0.58 | $ 0.64 | $ 0.70 | $ 0.77 | ||
| Present value workings | (0.581)/(1+12.2%)^1 = $0.52 | (0.639)/(1+12.2%)^2 = $0.51 | (0.703)/(1+12.2%)^3 = $0.50 | (0.773)/(1+12.2%)^4 = $0.49 | $ 2.01 | |
| Year 6+ dividends | Terminal value = (Dividend x (1+growth rate)) / ( Cost of equity - growth rate) | (0.77*1.04)/(12.2%-4%) =$9.77 | ||||
| Present value of Terminal value workings | (9.77)/(1+12.2%)^4 = 6.16 | 6.16 | ||||
| Estimated value on December 31, 2020 | 2.01+6.16= $8.17 | |||||
| 2022 | 2023 | 2024 | PV | |||
| Year 3-5 dividends | $ 0.64 | $ 0.70 | $ 0.77 | |||
| Present value workings | (0.639)/(1+12.2%)^1 = $0.57 | (0.703)/(1+12.2%)^2 = $0.56 | (0.773)/(1+12.2%)^3 = $0.55 | $ 1.68 | ||
| Year 6+ dividends | Terminal value = (Dividend x (1+growth rate)) / ( Cost of equity - growth rate) | (0.77*1.04)/(12.2%-4%) =$9.77 | ||||
| Present value of Terminal value workings | (9.77)/(1+12.2%)^3 = $6.92 | 6.92 | ||||
| Estimated value on December 31, 2021 | 1.68+6.92 = $8.60 | |||||
| Cost of equity = Risk free rate + (Beta x (Market return - Risk free rate)) | ||||||
| 5%+(1.2*(11%-5%)) = 12.2% | ||||||
| Cost of equity = 12.2% | ||||||
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