Calculate the required rate of return on equity

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Reference no: EM131988449

SND operates in the energy sector. Assume that during the past three years (2014, 2015, and 2016), SND generated the following total dividends to its common equity shareholders (amounts are in millions).

Year 2014	2015	2016
Common dividend payments	679	750	793
Stock repurchases	671	366	298
Total	1,350	1,116	1,091

Assuming 5% growth in earnings and 5% concurrent growth in dividends for next five years, the following table presents the projected total dividends to the common equity shareholders (amounts are in millions).

Year + 1 Year + 2 Year + 3 Year + 4 Year + 5 Year + 6

Projected growth 5% 5% 5% 5% 5% 3%

Projected dividends to common equity $1,146 $1,203 $1,263 $1,326 $1,392 $1,434

In Year+6 and beyond, the total dividends (as well as income statement and balance sheet) are expected to grow at long-term rate of 3%. Dividends for Year+6 are already calculated in the above table.

Following are the additional assumptions at the start of Year + 1:

SND's market beta is 0.8.

Risk free rate is 3.0%

Market's risk premium is 6.0%

Number SND shares are 400 million

Share price : $28.56

Please answer the following questions:

a. Calculate the required rate of return on equity as of beginning Year + 1

b. Calculate the sum of the present value of total dividends for 5 years (Year+1 through Year+5).

c. Calculate the continuing value at the start of year + 6 using the perpetuity-with-growth model using the year+6 dividends provided in the above table. Calculate the present value of continuing value as of the start of Year + 1.

d. Compute the total present value as of start of Year + 1. Apply the adjustment for midyear discounting.

e. Compute the value per share as of beginning of Year+1

f. Do you think the share price of SND is overpriced, underpriced, or correctly priced at the start of Year + 1?

Reference no: EM131988449

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