Question

Nina, a lead fundamental analyst was trying to calculate the intrinsic value (IV) of X Co. stock in order to provide some investment recommendations (buy, sell) on the stock.

X Co. Just give a dividend of Rs. 6 per share.

EPS currently is Rs. 15 per share.

The company plans to maintain the same dividend payout ratio every year for the next three years.

The return on retained earnings is expected to be the same as historical ROE of 20% for the first three years. The above information suggests that the dividend is expected to grow at 12% for the first three years.

After three years, the growth rate in dividends will decline to 6% owing to fewer investment opportunities. However, this 6% growth rate in dividends will continue till perpetuity.

Stock of X Co. is currently trading in the market at Rs 150 per share (Market Price) after the dividend payment announcement.

What is the intrinsic value of the stock per share today if the discount rate is 15% and what would the investment recommendations be (buy,sell) for this stock today?

Answer 1

Price of Stock = PV of CFs from it.

DIv Calculation:

Year	Particulars	CF	Formula	Calculation
1	D1	$      6.72	D0(1+g)	6*1.12
2	D2	$      7.53	D1(1+g)	6.72*1.12
3	D3	$      8.43	D2(1+g)	7.53*1.12
4	D4	$      8.94	D3(1+g)	8.43*1.06

P3 = D4 / [ Ke - g ]

P3 = Price after 3 Years

D4 = DIv after 4 Years

Ke = Required Ret

G = Growth Rate

P3 = D4 / [ Ke - g ]

= $ 8.94 / [ 15% - 6% ]

= $ 8.94 / 9%

= $ 99.28

Price Today:

Year	Particulars	CF	PVF @15%	Disc CF
1	D1	$      6.72	0.8696	$      5.84
2	D2	$      7.53	0.7561	$      5.69
3	D3	$      8.43	0.6575	$      5.54
3	P3	$   99.28	0.6575	$   65.28
Price Today	$   82.36

Pls do rate, if the answer is correct and comment, if any further assistance is required