Simon is an equity analyst. He is now analyzing a vacuum cleaner company called Wesuck. The stock of Wesuck is currently selling for $50 per share. Wesuck has just paid a cash dividend of $1. Simon estimates that the dividend will grow at a rate of 6% in the coming 2 years, then stop growing thereafter. The dividends are paid once every year. The market required rate of return of Wesuck is flat at 4% for all tenors. 

a). Calculate the current intrinsic value of Wesuck by Dividend Discount Model (DDM). 

b). It is projected that the earning of Wesuck in next year will be $2. Using the intrinsic value from part (a), calculate the present value of growth opportunities (PVGO) of Wesuck. 

c). Simon sees a big difference in the intrinsic value and the market value of the stock. Is the market crazy? What reasons may lead to such big difference in Simon’s analysis?rn

Answer rating: 100% (QA)

Wesuck Particulars Year 0 Year 1 Year 2 Year 3 Dividend growth rate 6 6 0 Current Dividend 100 Proje... View the full answer