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Calculate the current intrinsic value of wesuck

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Reference no: EM132694266

Simon is an equity analyst. He is now analysing a vacuum cleaner company called Wesuck. The stock of Wesuck is currently selling for $50 per share. Wesuck has just paid a cash dividend of $1. Simon estimates that the dividend will grow at a rate of 6% in the coming 2 years, then stop growing thereafter. The dividends are paid once every year. The market required rate of return of Wesuck is flat at 4% for all tenors.

a) Calculate the current intrinsic value of Wesuck by Dividend Discount Model (DDM).

b) It is projected that the earning of Wesuck in next year will be $2. Using the intrinsic value from part (a), calculate the present value of growth opportunities (PVGO) of Wesuck.

c) Simon sees a big different in the intrinsic value and the market value of the stock. Is the market crazy? What reasons may lead to such big difference in Simon's analysis?

Reference no: EM132694266

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