Company ATA operates in the capital goods and technology space. It is involved in the engineering,...
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Company ATA operates in the capital goods and technology space. It is involved in the engineering, manufacturing, automation, power, and transportation sectors. It operates globally and is one of the largest companies in the sectors in which it operates. It is a substantial employer in both its original, domestic French market, as well as dozens of countries around the world. Selected financial information for ATA appears below. Selected Financial Information for ATA Co. 2016 €6.74 €3.6 Year EPS DPS 2017 €7.45 €3.7 50% Payout ratio ROE Share price (XETRA - Frankfurt) €119.2 €104.2 Note: DPS stands for "dividends per share." 53% 15.6% 15.9% 2015 €8.85 €3.5 40% 22.3% €79.94 I 2014 €6.37 €3.3 52% 18.2% €94.37 2013 €5.08 €3.0 59% 14.6% €89.06 The analyst estimates the growth rate to be approximately 5.4 percent based on the dividend growth rate over the period 2013 to 2017 [3(1+g) = 3,7, so g = 5.4%). To verify that the estimated growth rate of 5.4 percent is feasible in the future, the analyst also uses the average of ATA's retention rate A and ROE for the previous five years (g = 0.49 x 17.3% = 8.5%) to estimate the sustainable growth rate. Using a number of approaches, including adding a risk premium to a long-term government bond and using the CAPM, the analyst estimates a required return of 7.5 percent. The most recent dividend of €3.70 is used for Do. 1. 2. 3. 4. 5. Use the Gordon growth model to estimate ATA's intrinsic value. How much does the dividend growth assumption add to the intrinsic value estimate? Based on the estimated intrinsic value, is a share of ATA undervalued, overvalued, or fairly valued? What is the intrinsic value if the growth rate estimate is lowered to 4.4 percent? What is the intrinsic value if the growth rate estimate is lowered to 4.4 percent and the required rate of return estimate is increased to 8.5 percent? Company ATA operates in the capital goods and technology space. It is involved in the engineering, manufacturing, automation, power, and transportation sectors. It operates globally and is one of the largest companies in the sectors in which it operates. It is a substantial employer in both its original, domestic French market, as well as dozens of countries around the world. Selected financial information for ATA appears below. Selected Financial Information for ATA Co. 2016 €6.74 €3.6 Year EPS DPS 2017 €7.45 €3.7 50% Payout ratio ROE Share price (XETRA - Frankfurt) €119.2 €104.2 Note: DPS stands for "dividends per share." 53% 15.6% 15.9% 2015 €8.85 €3.5 40% 22.3% €79.94 I 2014 €6.37 €3.3 52% 18.2% €94.37 2013 €5.08 €3.0 59% 14.6% €89.06 The analyst estimates the growth rate to be approximately 5.4 percent based on the dividend growth rate over the period 2013 to 2017 [3(1+g) = 3,7, so g = 5.4%). To verify that the estimated growth rate of 5.4 percent is feasible in the future, the analyst also uses the average of ATA's retention rate A and ROE for the previous five years (g = 0.49 x 17.3% = 8.5%) to estimate the sustainable growth rate. Using a number of approaches, including adding a risk premium to a long-term government bond and using the CAPM, the analyst estimates a required return of 7.5 percent. The most recent dividend of €3.70 is used for Do. 1. 2. 3. 4. 5. Use the Gordon growth model to estimate ATA's intrinsic value. How much does the dividend growth assumption add to the intrinsic value estimate? Based on the estimated intrinsic value, is a share of ATA undervalued, overvalued, or fairly valued? What is the intrinsic value if the growth rate estimate is lowered to 4.4 percent? What is the intrinsic value if the growth rate estimate is lowered to 4.4 percent and the required rate of return estimate is increased to 8.5 percent?
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The questions you presented involve the use of the Gordon Growth Model also known as the Dividend Discount Model to estimate the intrinsic value of a ... View the full answer
Related Book For
International Business
ISBN: 9781292274157
8th Edition
Authors: Simon Collinson, Rajneesh Narula, Alan M. Rugman
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