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Create a table that illustrates the annual dividends per share paid by your selected company over the past 8 years. If the company has not paid dividends for 8 years, include as many years as available.
Calculate the growth in annual dividends per share each year and include this annual growth rate in your table.
To find the dividends your company has paid in the past 8 years, review the BUS401 |Picking a Company that Pays Dividends (Links to an external site.) video from Week 1.
Calculate the average dividend growth rate over the following periods:
the most recent 8 years,
the most recent 5 years, and
the most recent 3 years.
Summarize the trend in the dividend growth rates.
Have the dividend growth rates increased or decreased? By how much? Has the increase or decrease been steady or varied from year to year?
Determine two distinct estimates of the future dividend growth rate for this company: a high-end growth rate and a low-end growth rate. You are to choose these growth rates based on what is reasonable from the data you have on the company’s dividend growth in prior years, as presented in your table. The two future dividend growth rates can be any of following:
the most recent year growth rate;
the average growth rate over the 8-year period;
the average growth rate over the most recent 5 years;
the average growth rate of the most recent 3 years; or
a growth rate you select that is reasonable, given the 8-year, 5-year, and 3-year averages, as well as the recent year growth rates.
NOTE: Both dividend growth rates must be lower than the required rate of return used in the constant growth formula. See Part 2 below for the required rate of return to use in the constant growth formula.
Justify the determined the high-end dividend growth rate and low-end dividend growth rates for your company. In your justification, provide a least two financial facts from your Week 1 and Week 2 assignments to support your determination.
Part 2: Preliminary Valuation: (two to three paragraphs)
Calculate the stock price for your selected company using the constant growth formula and the low-end dividend growth rate you determined in Part 1. Show all calculations for this estimated stock price using the low-end dividend growth rate.
For the required rate of return (r), use the following assumptions:
For a large capitalization company (greater than $10.0 billion in market capitalization) use 10.0%.
For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 12.0%.
For a small-cap company (less than $2.0 billion in market capitalization) use 15.0%.
Show your calculations.
In a similar manner, calculate another estimate of the stock price for your selected company using the constant growth formula and the high-end dividend growth rate.
Use the same assumptions for the required rate of return (r) that you used for the low-end stock price, other than using the high-end dividend growth rate.
Show your calculations.
Compare each of the two stock prices you just calculated to the current stock price per share of the company.
State whether each constant growth stock price (low-end and high-end) is above or below the current price.
State whether each constant growth stock price (low-end and high-end) indicates if the stock price is currently under-valued or over-valued in the market.
Determine your concluded stock value, based on the two calculations using the constant growth formula.
Justify your conclusion of value for your stock, using either the high-end stock price or the low-end stock price from the constant growth formula. Include least two financial facts from your Week 1 and Week 2 analyses.