Question

Use the following information on Disney to answer the case questions.

◼ Disney’s current stock price is $140.00 per share. The average growth rate of the company’s dividend has been 17.7% from 2004 through 2018

◼ Disney’s return on equity is 28.0% and the company retains approximately 80.0% of its profits while paying out the remaining 20.0% in dividends.

◼ The company’s stock currently trades at 21.21 times its current year earnings estimate of $6.60 per share.

◼ Analysts expect the company to earn $6.19 per share in 2020 and $6.93 in 2021. ◼ Disney’s peers in media networks trade at 25.5 times their current year earnings estimates while peers in parks, experiences and consumer products at 21.9; studio entertainment at 19.1 and DTCI at 14.1.

◼ Assume the expected return for Disney’s stock is 6.9%.

What is Disney stock’s intrinsic value using Multi-Stage Growth Model?

Answer 1

Current Stock Price	$140
The average growth rate from 2014 to 2018	17.70%
RoE	28%
Retention ratio	80%
Dividend payout ratio	20%
Current PE	21.21
Estimate EPS for the current year (2019)	$6.60
Estimated Dividend per share for 2019	$1.32
Expected EPS for 2020	$6.19
Expected EPS for 2021	$6.93
Expected return on equity	6.90%
Table	2019	2020	2021
Earnings per share	6.6	6.19	6.93
Dividend per share	1.32	1.238	1.386
Discounted value of dividend to present value	1.23	1.08	1.13
Dividend payout ratio	20%	20%	20%
Retention ratio	80%	80%	80%
Post-2021 Company is expected to grow at a stable growth rate with an 80% retention ratio.
The stable growth rate is defined as the product of retention ratio and expected return on equity.	5.5200%
The terminal value of the dividend	105.98
Present value of terminal value	86.75
According to the model, the stock price is the sum of all discounted dividends and terminal value values.	90.21
Stock is overpriced