$($PLEASE ANSWER ALL $5$ QUESTIONS$)$

Oppos Australia operates in the capital goods and technology space. It is involved in the engineering, manufacturing, automation, power, and telecommunications sectors$.$ It operates throughout Asia and is one of the largest companies in the sectors in which it operates. It is a substantial employer in both its original, domestic market, as well as other countries around the world.

Selected financial information for appears in Exhibit $1.$

Exhibit $1$ Selected Financial Information

Year $20222021202020192018$

EPS $$7\mathrm{.}45$ $$6\mathrm{.}74$ $$8\mathrm{.}85$ $$6\mathrm{.}37$ $$5\mathrm{.}08$

DPS $$3\mathrm{.}70$ $$3\mathrm{.}60$ $$3\mathrm{.}50$ $$3\mathrm{.}30$ $$3\mathrm{.}00$

Payout ratio $50\%53\%40\%52\%59\%$

ROE $15\mathrm{.}6\%15\mathrm{.}9\%22\mathrm{.}3\%18\mathrm{.}2\%14\mathrm{.}6\%$

Share price $$119\mathrm{.}20$ $$104\mathrm{.}20$ $$79\mathrm{.}94$ $$94\mathrm{.}37$ $$89\mathrm{.}06$

The analyst estimates the growth rate to be approximately $5\mathrm{.}4$ percent based on the dividend growth rate over the period $2018$ to $2022,[3(1+$g$)4=3\mathrm{.}7,$ so g$=5\mathrm{.}4\%].$ To verify that the estimated growth rate of $5\mathrm{.}4$ percent is feasible in the future, the analyst also uses the average retention rate and ROE for the previous five years $($g$0\mathrm{.}49\backslash$times $17\mathrm{.}3\%8\mathrm{.}5\%)$ to estimate the sustainable growth rate.

Using a number of approaches, including adding a risk premium to a long$-$term Australian government bond and using the CAPM, the analyst estimates required return of $7\mathrm{.}5$ percent. The most recent dividend of $$3\mathrm{.}70$ is used for D$0.$

Additional insight and non$-$assessable example of sensitivity analysis

The Gordon growth model estimate of intrinsic value is extremely sensitive to the choice of required rate of return r and growth rate g$.$ It is possible that the growth rate assumption and the required return assumption used initially were too high. Worldwide economic growth is typically in the low single digits, which may mean that a large company such as the hypothetical Oppos Australia may struggle to grow dividends at $5\mathrm{.}4$ percent into perpetuity. The Exhibit below presents a further sensitivity analysis of Oppos Australia$$s intrinsic value to the required return and growth estimates.

g$=2\mathrm{.}5\%$ g$=3\mathrm{.}5\%$ g$=4\mathrm{.}5\%$ g$=5\mathrm{.}5\%$ g$=6\mathrm{.}5\%$

r$=6\%108\mathrm{.}4153\mathrm{.}2257\mathrm{.}8780\mathrm{.}7-$

r$=7\%84\mathrm{.}3109\mathrm{.}4154\mathrm{.}7260\mathrm{.}2788\mathrm{.}1$

r$=8\%69\mathrm{.}058\mathrm{.}1110\mathrm{.}5156\mathrm{.}1262\mathrm{.}7$

r$=9\%58\mathrm{.}369\mathrm{.}685\mathrm{.}9111\mathrm{.}5157\mathrm{.}6$

r$=10\%50\mathrm{.}658\mathrm{.}970\mathrm{.}386\mathrm{.}7112\mathrm{.}6$

Note that no value is shown when the growth rate exceeds the required rate of return. The Gordon growth model assumes that the growth rate cannot be greater than the required rate of return.

$1.$ Assuming it is $2022,$ use the Gordon growth model to estimate Oppos Australia's intrinsic value.

$2.$ How much does the dividend growth assumption add to the intrinsic value estimate? The answer should be in dollars $($not percentage$)$

$3.$ Based on the estimated intrinsic value, is a share of Oppos Australia undervalued, overvalued, or fairly valued?

$4.$ What is the intrinsic value if the growth rate estimate is lowered to $4\mathrm{.}4$ percent?

$5.$ What is the intrinsic value if the growth rate estimate is lowered to $4\mathrm{.}4$ percent and the required rate of return estimate is increased to $8\mathrm{.}5$ percent?