Question: 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

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

Step by Step Solution

★★★★★

3.43 Rating (156 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

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

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

Currently a share of Globex Industries trades for $65 per share. In one year, Globexs share price will be $80 with probability 0.62 or $55 with probability 0.38. A riskless bond also exists with a...

The Brigapenski Co. has just paid a cash dividend of $2 per share. Investors require a 16% return from investment such as this. If the dividend is expected to grow at a steady 8% per year, what is...

The stock of Dravo Corporation currently pays a dividend (D0) at the rate of $2 per share. This dividend is expected to increase at a 9 percent annual rate for the next three years, at a 7 percent...

Your boss has asked you to estimate the intrinsic value of the equity for Google, which does not currently pay any dividends. You are going to use an income approach and are trying to choose between...

Kilimanjaro Inc. began operations on January 6, 2007, with the issuance of 400,000 shares of $50 par common stock . The sole stockholders of Kilimanjaro Inc. are Donna White and Dr. Larry Klein, who...

Las Animas Inc. began operations on January 2, 2008, with the issuance of 100,000 shares of $50 par common stock . The sole stockholders of Las Animas Inc. are Cindy Stern and Dr. Kassay Heyen, who...

A business executive is offered a management job at Generous Electric Company, which offers him a 5-year contract that calls for a salary of $62,000 per year, plus 600 shares of GE stock at the end...

Biosciences Unlimited Inc. began operations on January 2, 2010, with the issuance of 100,000 shares of $50 par common stock . The sole stockholders of Biosciences Unlimited Inc. are Rafel Baltis and...

A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firms shares is $35.00, what is the required return applicable to the...

Five shareholders together own 35 percent of the outstanding stock of Edmonds Industries. The remaining 65 percent is divided among several thousand shareholders. There are 400,000 shares of Edmonds...

This information provided below is for Sparkles Pty Ltd for the year ended 31 December 2021: Equipment $90,000 Salaries payable 23,000 Dividends Paid during 2021 14,000 Accounts payable 120,200...

According to the companys website, the top 25% of the candidates who take the entrance test will be called for an interview. You have just been called for an interview. The reported mean and standard...

what are the correct answsers Paroles Les nouvelles technologies Completez chaque phrase avec le mot ou l'expression qui convient selon le contexte. Utilisez chaque mot ou expression une seule fois....

Apply Genetic algorithm with the maximization problem of f(x)=x2-x-1, where x is an integer with a range -15x20. At least derive it for 3 generations with appropriate explanation and represent the...

The 4-Horsepower tillers produced by your company can be branded as either Taylor brand or OEM (i.e., there are two options). The two-level MPS for the final assembly schedule and the Taylor brand...

1. The college bookstore provides vital services that are critical to students, especially during book purchasing period. The bookstore manager can offer services for up to four separate cash...

1- Prepare an analytical written report on a company that includes the following information: - General introduction about the company The emergence of the company and the most important historical...

Top 5 Site To Buy Verified Payoneer Accounts USA, UK And CA If you want to more information just knock us- 24 Hours Reply/Contact WhatsApp: +1 (737) 283 -1486 Telegram: @pvasmmservice Skype:...

Please solve the below question step wise... Equity analysis (13 marks) Simon is an equity analyst. He is now analysing a vacuum cleaner company called Wesuck. The stock of Wesuck is currently...

Simon is an equity analyst. He is now analysing 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...

please help with number 1 and 2 please. please help me to solve que 1 and 2 which is in page 2. please help with que 1 and 2. thank you so much Making Firm Investment Decision at GM GM is a large car...

The Case Study Making Ford Firm Investment Decision Ford is a large cars makers firm considering replacing one of its painting machine with either of two new machines, machine A or machine B. Machine...