Question

Carnival Corporation (CCL) & Plc operates as a leisure travel company. The company's ships visit approximately 700 ports under the Carnival Cruise Line, Princess Cruises, Holland America Line, Seabourn, P&O Cruises (Australia), Costa Cruises, AIDA Cruises, P&O Cruises (UK), and Cunard brand names. Carnival expects to pay a year-end dividend of $1.60. Investors expect the growth rate in dividends to increase at a constant rate of 8 percent a year. Assume that investors require a rate of return of 15 percent for Carnival stock. Assume that Carnival’s stock is currently trading at $36. Required: Calculate the price (intrinsic value) of Carnival stock and discuss whether this stock is over or undervalued.

Answer 1

Carnival Expected to pay Dividend at year end (D1) = $1.60

Expected Growth Rate of dividend per year (g) = 8%

Required rate of return for Investors (Ke) = 15%

Calculating the Intrinsic Price of Carnival Stock:-

$Price = \frac{D_1}{(Ke-g)}$

$Price = \frac{1.60}{(0.15-0.08)}$

Price = $22.86

So, Intrinsic price of Carnival Stock is $22.86

Carnival stock is currently trading at = $36

As the Current price is higher than the Intrinsic Price, the Stock is Overvalued. & Overvalued stock should be sold.

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