05 Jul Investment HW – denniswright
| Assignment 3: Dividend Discount Model. Complete and submit on Due Date | |||||||
| Look at the DDM example below. Now look up electric utility company Eversource Energy (formerly Northeast Utilities), symbol ES, on Bloomberg. | |||||||
| Using the data available and provided on Bloomberg, find the value of ES. What is ES’s Intrinsic Value? Is ES Overvalued, Fairly Valued or Undervalued? | |||||||
| Use the Analyst Estimates to derive your value (HINTS: Use the Growth Est. for the Next 5 Years (per annum) and assume a Terminal Growth Rate of 2%, since it is a slow growth utility. Calculate the Required Rate of Return). | |||||||
| Explain your answer. | |||||||
| Perform this analysis for 2 other stocks in your portfolio. Explain your conclusions on these stocks as well. | |||||||
| Dividend Discount Model Guideline Example | |||||||
| Assume Security A has generated annual dividend growth of 10.0% over the past 3 years. The most recent annual dividend is $2.00. | |||||||
| Assume Security A will continue to increase dividends at 10.0% for the next 5 years before reducing its dividend growth to 5% for the long term. | |||||||
| Also assume that the required return for A’s stock is 15%. It is currently trading for $35.59 | |||||||
| Current Stock Price of A | 35.59 | ||||||
| Growth rate for years 1-5 | 0.1 | g1 | |||||
| Growth rate for years 6+ | 0.05 | g2 | |||||
| Required return | 0.15 | k | |||||
| Year | CF | PVCF | |||||
| 0 | D | 2.00 | |||||
| 1 | D | 2.20 | 1.9130434783 | ||||
| 2 | D | 2.42 | 1.8298676749 | ||||
| 3 | D | 2.66 | 1.7503082107 | ||||
| 4 | D | 2.93 | 1.6742078537 | ||||
| 5 | D | 3.22 | 1.6014162079 | ||||
| 5 | V | 33.82 | 16.8148701833 | ||||
| PV | 25.5837136088 | ||||||
| Current Stock Price of A | 35.59 | ||||||
| Difference | -10.0062863912 | ||||||
| Intrinsic Value | < | Price | |||||
| 25.5837136088 | < | 35.59 | < Price, So Sell |
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