Question

Pleae answer all the questions asked in problem 1 and 2. PLEASE SHOW ALL WORK

Е Е ЕЕЕ 20 Аавьсар Аавьсср Аавьс. Аавьссс Аав Аавьсан 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Paragraph Styles Stock Valuation Homework: A Amazon (AMZN) a. Stock's Beta? b. Rate of return on the market (S&P 500 index)? C. Risk-free rate? d. The latest dividend paid. e. Annual expected growth rate of returns? B. Solve for intrinsic stock price based on above calculations, compare the calculated price with the current market price. Indicate whether is the stock overvalued, undervalued or equilibrium? Explain ар

Answer 1

AMZN latest dividend paid is zero.

The company has never paid a dividend. Hence, the dividend discount model cannot applied to this company to calculate intrinsic value.

For any other company, the intrinsic value is calculated as below :

intrinsic value = next year dividend / (required return - risk free rate)

next year dividend = last annual dividend * (1 + constant dividend growth rate)

constant dividend growth rate = Return on equity * retention ratio

retention ratio = (1 - dividend payout ratio)

required return = risk free rate + (beta * (expected market return - risk free rate))

Risk free rate is the yield on 10-year Treasury bonds, which is 1.75%.

Beta can be obtained by looking up the relevant company in Yahoo Finance.

Expected market return is the historical average annual return on the S&P 500, which is 10%.