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You are supposed to analyze the price of JB Hunt (ticker: JBHT) stock TODAY: $169.78. JBHT just paid an annual dividend (D0) of $1.20. For the next 5 years, the dividends are expected to grow at the rate of 7.5% per year (based on projections in ValueLine). Assume that the dividend in year 6 is expected to grow from D5 at the rate of 6.5%, and all the subsequent dividends until year 15 will grow at 6.5%. Assume that the dividend in year 16 is expected to grow from D15 at the rate of 5.75% and all the subsequent dividends will grow by 5.75% as well, forever.
Required rate of return: assume that the risk-free rate is equal to 4 % per year forever and that the market risk premium from 2021 will stay constant forever as well. Assume the measure of economy-wide risk exposure JBHT is associated with today will stay constant forever as well.
Problem 1: Imagine that you are working for a hedge fund. Would you recommend buying JBHT stocks or selling them short (i.e. borrowing the stocks from a broker, selling them on the open market, and hoping to buy JBHT shares back later at a lower price)? Why?
MRP = 5%
Beta = 1.0
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