Below you see forecasted EPS for F&H industries. The company maintains a 25% dividend payout rate. You estimate the cost of equity to be 12%. The current stock price of the company is $21.

A. Compute the intrinsic value of the stock based on the dividend discount model, assuming that after year 7 the company will enter a sustained growth period with g=5%.

B. Is the stock over- or undervalued? What would you recommend to a potential investor?

C. What if in fact the appropriate discount rate r was not 12%? Pick a LOWER discout rate and explain how it would change your estimated intrinsic value (i.e. recalculate the intrinsic stock price)? What would you recommend then?

Forecasted EPS for F&H Industries
Year	1	2	3	4	5	6	7
Earnings Per Share	$ 5.23	$ 6.28	$ 7.41	$ 8.59	$ 9.79	$ 10.87	$ 11.00

Answer rating: 100% (QA)

To compute the intrinsic value of the stock based on the dividend discount model we need to calculate the present value of future dividends Heres how ... View the full answer