STOCK VALUATION

Group 6: Siti Ruzanna bt Mohd Faruk Nadhrah bt Othman Nor Hazliana bt Md Rosdan

Assessing the Impact of Suarez Manufacturings Proposed Risky Investment on Its Stock Value
Annual Dividends paid on the Firms Common Stock
Year 2009 2008 2007 2006 Dividend/Share $ 1.90 $ 1.70 $ 1.55 $ 1.40

2005

$ 1.30

Comparison
Not Undertaking Investment
Dividend in 2010, D2010 = $ 2.09 Required return, rs = 14% Dividend in 2010, D2010 = $ 2.15 Required return, rs = 16% Best case:

Undertaking Investment

Growth

Worst Case:

2010 to infinity = 13% 2010 to 2012 = 13% 2013 to infinity = 10%

 a) Find the current value per share of Suarez Manufacturings common stock.

To find the historical annual growth rate of dividends, solve for g.

2009 = 2005 1 + 2005 1 = 2009 (1 + )4
4

1.90 1.30

= (1.46154)1/4 1 = 1.0995 1 = 0.0995 = 10%

To calculate the value of firms common stock

1 = 0(1 + )

0 =

2010 = 2009 1 +
By substituting the values rs=0.14 g=0.10 The value of stock could be calculated.

1.90(1 + 0.10) 0 = 0.14 0.10

2.09 = 0.04 = $.

 B) Find Value Per Share if Undertake the Investment (Assume dividend growth stays 13% forever)

To calculate the value of firms common stock

1 = 0(1 + )

0 =

2010 = 2009 1 +
By substituting the values given rs=0.16 g=0.13 The value of stock could be calculated.

1.90(1 + 0.13) 0 = 0.16 0.13

2.15 = 0.03 = $ .

Compare & Effect

Without investment the price of common stock is $ 52.25 . With investment the price of common stock is $71.67 .

The proposed investment will increase the price of the common stock.

Rate of return

Price

 C) Do the stockholders win? Should the firm undertake the investment?

 Stockholders win as a result of undertaking the proposed risky investment. The firm should do it as the price per share increases by $19.42 ($71.67 $52.25). This is because higher risk and higher return will increase the dividend growth rate and stock value.
Risk Return Growth Value

 D) Reworks part b and c assuming that at the beginning of 2013 the annual growth rate of returns to the rate experienced by 2005 to 2009.

By using Variable Growth Model

g2010-2012= g1 =0.13; g2013-= g2 =0.10; r = 0.16
Step 1. Find value of cash dividends at the end of each year, Dt, during the initial growth period, years 1 t0 3.

Dt = D0 (1 + g1)t
Step 2. Find the PV of dividends expected during the initial growth period
3

=1

1 +

Calculation of Present Value from 2010 to 2012

t 1 2 3

End of year 2010 2011 2012

D0=2010 2.15 2.15 2.15

(1+g1)t

Dt $ 2.15

(1+r)t 1.16 1.35 1.56

PV of dividend 1.85 1.81 1.76

1.13 1.2769

$ 2.43 $ 2.75

Sum of present value of dividends = $ 5.42

Step 3: The value of the stock at the end of the initial growth period

DN+1=2013 D2013= D2012(1+g2) = $ 2.75 x (1+0.10) = $ 3.03 By using D2013 = $3.03, a 16% required return, and a 10% dividend growth rate, we can calculate the value of the stock at the end of 2012 as follows:

2012 =

2013 2

3.03 0.160.10

3.03 0.06

= $ 50.50

Step 3(cont): Finally, the share value of $50.50 at the end of 2012 must be converted into a present (end of 2009) value.

2012 1+ 3

50.50 1+0.16

= $ 32.35

Step 4: Adding the PV of the initial dividend stream (found in Step 2) to the PV of the stock at the end of the initial growth period (found in Step 3), we get:

0 = 2009 = $5.42 + $32.35 = $ .

Compare & effect

The stockholders lose as a result of undertaking the proposed risky investment.
The price per share decreases by $14.88 ($52.25$37.37). This is because the growth rate of dividend is below the required return. The firm should not undertake the proposed project because:
Dividend Stock value