Question 3

CVX Tech is known for creating innovative technology solutions for electric vehicle manufactures. Three years ago, the company has raised $80 million through an IPO. However, it has not earned any profit so far. Analysts are expecting that CVX will earn a profit of 80 cents per share next year. The forecasted earnings per share for following two years are $1.2 and $1.5. Then onwards the firms dividends are expected to grow at a constant rate. The firms ROE is expected to be 20% and the firm plans to to distribute about 40% of its earnings as dividends in future. CVXs cost of equity is estimated to be 15% pa.

1. Based on the information estimate CVXs intrinsic value using a multistage dividend growth model. Show your calculations.

2. Do you think a dividend discount model is appropriate for valuation of a firm like CVX? Briefly discuss your answer with explanation