You are interested in determining the intrinsic value of Hoffman Inc. Your analysis shows that the firm’s growth rate will drop from its current pace by 20% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely. Lastly, your estimate of the required return on the firm’s equity is 12%. Hoffman’s recently published annual report shows the following financial relationships: Assets = 1.4 x Equity Current Assets = 1.7 x Current Liabilities Sales = 1.5 x Assets Net Income = 8% x Sales Dividends = 30% x Net Income Earnings per share (Basic) = $0.80 per share Required: Use the multi-period DDM to estimate the intrinsic value of the company’s stock now, at the beginning of year 1.
You are interested in determining the intrinsic value of Hoffman Inc. Your analysis shows that the firm’s growth rate will drop from its current pace by 20% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely. Lastly, your estimate of the required return on the firm’s equity is 12%. Hoffman’s recently published annual report shows the following financial relationships: Assets = 1.4 x Equity Current Assets = 1.7 x Current Liabilities Sales = 1.5 x Assets Net Income = 8% x Sales Dividends = 30% x Net Income Earnings per share (Basic) = $0.80 per share Required: Use the multi-period DDM to estimate the intrinsic value of the company’s stock now, at the beginning of year 1.
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 10P
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Question
You are interested in determining the intrinsic value of Hoffman Inc.
Your analysis shows that the firm’s growth rate will drop from its current pace by 20% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely.
Lastly, your estimate of the required return on the firm’s equity is 12%.
Hoffman’s recently published annual report shows the following financial relationships:
Assets = 1.4 x Equity
Current Assets = 1.7 x Current Liabilities
Sales = 1.5 x Assets
Net Income = 8% x Sales
Dividends = 30% x Net Income
Earnings per share (Basic) = $0.80 per share
Required:
- Use the multi-period
DDM to estimate the intrinsic value of the company’s stock now, at the beginning of year 1.
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