Reference no: EM132986833

Question - As a security analyst you are analysing the stock of Pogo Pogo, a Pogo Stick business. The stock of Pogo Pogo is currently selling for $28 per share. Pogo Pogo has paid a cash dividend of $1 last year and will pay its next dividend later today. You assume that the dividend has grown at a rate of 5% for the last couple of years and will continue to do so for another 3 years, then stop growing thereafter. The dividends are paid once every year. The market required rate of return of Pogo Pogo is flat at 4%.

a) Calculate the current intrinsic value of Pogo Pogo by Dividend Discount Model (DDM). Draw a timeline of cash flows.

b) Rather than using a given discount rate of 4%, you decide to re-assess its discount rate using CAPM. Pogo Pogo has a beta of 1.5 with an expected market risk premium of 2% and a risk-free rate of 2%. What is the required rate of return? What is the new intrinsic value?

c) Is Pogo Pogo's stock currently overpriced, correctly priced or under-priced? Use your analysis in a) and b) in your discussion. Can you be certain to be right? Name 2 examples where you could have gone wrong.