Reference no: EM132711552
You are interested in determining the intrinsic value of Hoffman Inc.
Your analysis shows that the firm's growth rate will drop from its current pace by 30% each of the next two years, and then you estimate that dividends will continue to grow at the year 2 rate, with the same dividend policy in place, indefinitely.
Lastly, your estimate of the required return on the firm's equity is 15%.
Hoffman's recently published annual report shows the following financial relationships:
Assets = 1.6 x Equity
Current Assets = 1.5 x Current Liabilities
Sales = 1.2 x Assets
Net Income = 10% x Sales
Dividends = 40% x Net Income
Earnings per share (Basic) = $1.10 per share
Required:
1. Determine the growth rate of the company for the prior and for each of the next two years.
2. Use the multi-period DDM to estimate the intrinsic value of the company's stock now, at the beginning of year 1.
3. If all of your expectations remain as shown, except that, on the last day of year 1, the required return decreases by 1%. What would be your holding period return for the year?
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