You have been hired as an equity analyst and asked to estimate the stock price of the
Question:
You have been hired as an equity analyst and asked to estimate the stock price of the Target Corporation (TGT). After examining its financials and growth expectations, you determine to use dividend discount model (DDM) and price-multiples approaches to estimate the intrinsic value of Target.
Target's stock price, earnings per share (EPS), and dividends per share (DPS) for the past 6 years are given below.
| Fiscal Year | Stock Price $ | EPS $ | DPS $ |
| 2016 | 72.23 | 4.69 | 2.32 |
| 2017 | 65.25 | 5.29 | 2.44 |
| 2018 | 66.43 | 5.51 | 2.52 |
| 2019 | 124.76 | 6.36 | 2.60 |
| 2020 | 176.53 | 8.64 | 2.00 |
| 2021 | 231.44 | 14.10 | 3.16 |
Dividends have grown at an annual compounded rate of 6.4% in the past 5 years (2016-2021) and are projected to increase at an annual rate of 8% in the next four years (2022-25). Beyond 2025, the annual dividend growth is expected to slow down to a constant growth rate of 7%.
Target's beta is estimated as 1.1. The current U.S. 10-year Treasury bill rate is 3%. Historically, the market risk premium in the U.S. stock market has been estimated as 6%. The required return of a stock or the discount rate is estimated using the Capital Asset Pricing Model (CAPM) equation.
You have compiled the projected earnings per share for 2022 for Target and Walmart in the retail stores' industry.
| Retail Stores (Stock Symbol) | Current Stock Price $ (July 01, 2022) | 2022 Projected EPS $ |
| Target (TGT) | 142.38 | 8.70 |
| Walmart (WMT) | 122.63 | 6.41 |
Would you recommend buying Target stock? Justify with reasons
Expert Answer:
To estimate the intrinsic value of Target Corporation using the Dividend Discount Model DDM and PriceMultiples approaches we need to make the followin... View the full answer
