Joel Williams follows Sonoco Products Company (NYSE: SON), a manufacturer of paper and plastic packaging for both consumer and industrial use. SON appears to have a dividend policy of recognizing sustainable increases in the level of earnings with increases in dividends, keeping the dividend payout ratio within a range of 40 percent to 60 percent. Williams also notes: SON’s most recent quarterly dividend (ex-dividend date: 15 August 2007) was $0.26, consistent with a current annual dividend of 4x $0.26 =$1.04 per year. SON’s forecasted dividend growth rate is 6.0 percent per year. With a beta of 1.13, given an equity risk premium (expected excess return of equities over the risk-free rate, E [RM] – RF) of 4.5 percent and a risk-free rate (RF)of 5 percent, SON’s required return on equity is r= RF + beta[E(RM) – RF]=5.0+1.13(4.5)=10.1 percent, using the capital asset pricing model (CAPM). Williams believes the Gordon growth model may be an appropriate model for valuing SON. Calculate the Gordon growth model value for SON stock. The current market price of SON stock is $30.18. Using your answer to question 1, judge whether SON stock is fairly valued, undervalued, or overvalued.
Joel Williams follows Sonoco Products Company (NYSE: SON), a manufacturer of paper and plastic packaging for both consumer and industrial use. SON appears to have a dividend policy of recognizing sustainable increases in the level of earnings with increases in dividends, keeping the dividend payout ratio within a range of 40 percent to 60 percent. Williams also notes: SON’s most recent quarterly dividend (ex-dividend date: 15 August 2007) was $0.26, consistent with a current annual dividend of 4x $0.26 =$1.04 per year. SON’s
Williams believes the
- Calculate the Gordon growth model value for SON stock.
- The current market price of SON stock is $30.18. Using your answer to question 1, judge whether SON stock is fairly valued, undervalued, or overvalued.
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