Your boss,Sally Maloney,treasurer of Fred Clark Enterprises (FCE) ,asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00,and the stock now sells for $15.00 per share.Sally asked a number of security analysts what they believe FCE's future dividends will be,based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3,and it will be increased at a rate of 5% per year in Year 4 and thereafter.Sally asked you to use that information to estimate the required rate of return on the stock,r_s,and she provided you with the following template for use in the analysis.

Sally told you that the growth rates in the template were just put in as a trial,and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV.She also notes that the estimated value for r_s, at the top of the template,is also just a guess,and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that,after you have put in the correct dividends,you can manually calculate the price,using a series of guesses as to the Estimated r_s.The value of r_s that causes the calculated price to equal the actual price is the correct one.She notes,though,that this trial-and-error process would be quite tedious,and that the correct r_s could be found much faster with a simple Excel model,especially if you use Goal Seek.What is the value of r_s?

Question

Your boss,Sally Maloney,treasurer of Fred Clark Enterprises (FCE) ,asked you to help her estimate the intrinsic value of the company's stock.FCE just paid a dividend of $1.00,and the stock now sells for $15.00 per share.Sally asked a number of security analysts what they believe FCE's future dividends will be,based on their analysis of the company.The consensus is that the dividend will be increased by 10% during Years 1 to 3,and it will be increased at a rate of 5% per year in Year 4 and thereafter.Sally asked you to use that information to estimate the required rate of return on the stock,r_s,and she provided you with the following template for use in the analysis.

Sally told you that the growth rates in the template were just put in as a trial,and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV.She also notes that the estimated value for r_s, at the top of the template,is also just a guess,and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price.She suggests that,after you have put in the correct dividends,you can manually calculate the price,using a series of guesses as to the Estimated r_s.The value of r_s that causes the calculated price to equal the actual price is the correct one.She notes,though,that this trial-and-error process would be quite tedious,and that the correct r_s could be found much faster with a simple Excel model,especially if you use Goal Seek.What is the value of r_s?

Quizplus · Accepted Answer

Using the provided template and the analysts' projected dividend growth rates, we get the following estimated HVs for different values of r_s: r_s = 10% --> Calculated Price = $11.25 r_s = 11% --> Calculated Price = $12.81 r_s = 12% --> Calculated Price = $14.51 r_s = 13% --> Calculated Price = $16.37 Using Goal Seek in Excel, we can find that the value of r_s that makes the Calculated Price equal to the Actual Market Price of $15.00 is approximately 12.97%. Therefore, the answer is D) 12.97%.

Your Boss,Sally Maloney,treasurer of Fred Clark Enterprises (FCE),asked You to Help