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Using constant dividend valuation model

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Written Assignment Student written assignment does not require internet access to extract data and is presented in a case format. Students are required to apply their knowledge of the valuation of financial asset to a case study by playing the role of an investor and make decisions and recommendations as they address each question. The guidelines for these assignments are given below. You can only start working on this assigned project after you have covered the materials in chapter 1, 8 and 9.

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Principles of Finance (FIN 330)- Project Assignment(Case study) You are considering investing in a company that has been paying regular dividends over the past six years as shown in the following table.

Year End Dividends per share:

2008 $2.25

2009 2.37

2010 2.46

2011 2.60

2012 2.76

2013 2.87

1. If you expect to earn 15 percent on similar-risk investments, using the constant dividend valuation model, what is the maximum price you will be willing to pay per share on January 1,2014?

2. Suppose the actual (observed) price of the stock on January 1, 2014 is $35, given you result in question number 1, determine if the stock will be undervalued or overvalued and by how much.

3. Give me your perspectives on why the actual price of $35 differs from your model value in question number 1.

4. As a follow up to question number 1, if you can only earn 10 percent instead of 15 percent, using the constant dividend valuation model, what is the most you will be willing to pay for the stock?

5. In reference to questions numbers 1 and 4, discuss briefly why the values of the share changes as you change the discount rate from 15 percent to 10 percent.

6. Assume the company's dividend remains the same at the end of 2013 and beyond. What is the maximum you will be willing to pay for the company's stock?

7. Explain what accounts for the difference between the results obtained in questions 1 and 4 with your result in question number 6.

8. Explain briefly why different models are used to value a company's stock.

Reference no: EM132413092

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