Question

Melissa Cutt is thinking about buying some shares of EZLawn​ Equipment, at $ 31.36 per share. She expects the price of the stock to rise to $ 46.61 over the next 3 years. During that time she also expects to receive annual dividends of $ 3.35 per share.

a. What is the intrinsic worth of this​ stock, given a required rate of return of 12 %​?

b. What is its expected​ return?

Answer 1

Intrinsic Worth = PV of CFs from it.

Year	CF	PVF @12%	Disc CF
1	$      3.35	0.892857	$      2.99
2	$      3.35	0.797194	$      2.67
3	$      3.35	0.71178	$      2.38
3	$   46.61	0.71178	$   33.18
Intrinsic Worth			$   41.22

Expected Ret is the Rate at which PV of Cash Inflows are equal to Today's price.

Year	CF	PVF @23%	Disc CF	PVf @24%	Disc CF
0	$ -31.36	1.0000	$ -31.36	1.0000	$ -31.36
1	$      3.35	0.8130	$      2.72	0.8065	$      2.70
2	$      3.35	0.6610	$      2.21	0.6504	$      2.18
3	$      3.35	0.5374	$      1.80	0.5245	$      1.76
3	$   46.61	0.5374	$   25.05	0.5245	$   24.45
NPV			$      0.43		$    -0.28

Expected Ret = rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Rate ] * 1%

= 23% + [ 0.43 / 0.70 ] * 1%

= 23% + 0.61%

= 23.61%