Question

Consider the case of Black Sheep Broadcasting Company: Black Sheep Broadcasting Company (BSBC) just paid a dividend of $2.88 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 20.00% over the next year. After the next year, though, Black Sheep's dividend is expected to grow at a constant rate of 4.00% per year. Complete the following table, assuming that the market is in equilibrium, and: • The risk-free rate (TRF) is 5.00% • The market risk premium (RPM) is 6.00%, and • Black Sheep's beta is 1.80 Note: Do not round intermediate calculations. Term Value Dividends one year from now (D1) Horizon Value (HV) Intrinsic Value

Answer 1

Expected return = risk free rate + beta * market risk premium

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

Dividend one year from now

= 2.88 * (1+20%)

= 2.88 * 1.2

= 3.456

= 3.46

Expected return = 5% + 1.8 * 6%

= 15.8%

Horizontal value = 2.88 * 1.2 * 1.04/(0.158-0.04)

= 30.4596610169

= 30.46

Intrinsic value = 3.46/1.158 + 30.4596610169/1.158

= 29.29

Dividend yield = 3.46/29.29

= 11.80%