As a broker at Churnem & Burnem Securities, you recommend stocks to your clients. After gathering data on Furniture Factory, you have found that its dividend has been growing at a rate of 4% per year to the current (Do) $1.35 per share. The stock is now selling for $24.50 per share, and you believe that an appropriate rate of return for this stock is 11% year. If you expect that the dividend will continue to grow at a 4% rate into the foreseeable future, what is the highest price at which you would recommend purchasing this stock to your clients? Suppose now that you believe that the company’s new product line will cause much higher growth in the near future. Your new estimate is for a three-year period of 9% annual growth to be followed by a return to the historical 4% growth rate. Under these new assumptions, what is the value using the two-stage dividend growth model? You now realize that it is likely that the growth will transition from 9% down to 4% gradually, rather than instantaneously. If you believe that the transition will take five years, what is the value of the stock? Use the three-stage and H-Model valuation method. For each of the answers above, create an If statement that shows whether the stock is undervalued, overvalued, or fairly valued. ***Solve using Excel

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 1P

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As a broker at Churnem & Burnem Securities, you recommend stocks to your clients. After gathering data on Furniture Factory, you have found that its dividend has been growing at a rate of 4% per year to the current (Do) $1.35 per share. The stock is now selling for $24.50 per share, and you believe that an appropriate rate of return for this stock is 11% year.

If you expect that the dividend will continue to grow at a 4% rate into the foreseeable future, what is the highest price at which you would recommend purchasing this stock to your clients?
Suppose now that you believe that the company’s new product line will cause much higher growth in the near future. Your new estimate is for a three-year period of 9% annual growth to be followed by a return to the historical 4% growth rate. Under these new assumptions, what is the value using the two-stage dividend growth model?
You now realize that it is likely that the growth will transition from 9% down to 4% gradually, rather than instantaneously. If you believe that the transition will take five years, what is the value of the stock? Use the three-stage and H-Model valuation method.
For each of the answers above, create an If statement that shows whether the stock is undervalued, overvalued, or fairly valued.
***Solve using Excel

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