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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Estimating Exxon Mobil Corporation's Intrinsic Stock Value

Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

In this chapter, we described the various factors that influence stock prices and the approaches that analysts use to estimate a stock’s intrinsic value. By comparing these intrinsic value estimates to the current price, an investor can assess whether it makes sense to buy or sell a particular stock. Stocks trading at a price far below their estimated intrinsic values may be good candidates for purchase, whereas stocks trading at prices far in excess of their intrinsic value may be good stocks to avoid or sell Although estimating a stock's intrinsic value is a complex exercise that requires reliable data and good judgment, we can use the Internet to find financial data in order to arrive at a quick "back-of-the- envelope" calculation of intrinsic value.

9. Until now, we have assumed that XOM’s dividend will grow at a long-run constant rate of 5%. To gauge whether this is a reasonable assumption, it's helpful to look at XOM's dividend history. If you go to the MSN Money website (www.msn.com/en-us/money/markets) and go to the annual income statement financials screen, you should see the firm's annual dividend over the past 4 years. On the basis of this information, what has been the average annual dividend growth rate?

On the basis of the dividend history and your assessment of XOM's future dividend payout policies, do you think it is reasonable to assume that the constant growth model is a good proxy for intrinsic value? If not, how would you use the available data on the Internet to estimate intrinsic value using the nonconstant growth model?

Summary Introduction

To identify: The average annual dividend growth rate. Whether, the constant growth rate model of dividend is better than the non-constant dividend model for proxy of intrinsic value. If not, indicate the use of non-constant dividend model for estimation of intrinsic value.

Introduction:

Average Annual Dividend Growth Rate: It refers to the average of the dividend growth rate for the past few years. It is calculated when the company has no fixed dividend growth rate per year.

Explanation

The spreadsheet table showing the annual dividend growth rate of the given company for past 5 years is,

Table (1)

Calculated values,

Growth rate for year 1 is 9.8%.

Growth rate for year 2 is 6.7%.

Growth rate for year 3 is 3.5%.

Growth rate for year 4 is 2.7%.

The formula to calculate average annual dividend growth rate is,

Rate=r1+r2+r3+r44

Where,

  • r1 is the growth rate for year 1.
  • r2 is the growth rate for year 2.
  • r3 is the growth rate for year 3.
  • r4 is the growth rate for year 4.

Substitute 9.8% for r1 , 6.7% for r2 , 3.5% for r3 and 2.7% for r4

Rate=9.8%+6.7%+3.5%+2.7%4=5.67%

  • The average annual dividend growth rate of the company is 5.67%.
  • The median year-end dividend forecast for the past 5 years is $2.88.
  • The median forecast of the company’s long term rate of growth for the past 5 years is 6

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