What is the value of target using the constant dividend

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Reference no: EM133633104

Case: You have been hired as an equity analyst and asked to estimate the stock price of Target Corporation (TGT). See the questions on page 2. After examining its financials and growth expectations, you decide to use the dividend discount models (DDM) and price-multiples approaches to estimate the intrinsic value of Target.

Target's stock price, earnings per share (EPS), and dividends per share (DPS) for the past 5 years are given below.

Fiscal Year	Stock Price $	EPS $	DPS $
2018	66.43	5.51	2.52
2019	124.76	6.36	2.60
2020	176.53	8.64	2.68
2021	231.44	14.10	3.16
2022	149.04	5.98	3.96

Analysts have estimated Target's perpetual constant dividend growth rate at 8%. Dividends are projected to increase at an annual rate of 10% in the next five years (2023-27). Beyond 2027, the annual dividend growth is expected to slow down to a constant growth rate of 8%.

Target's beta is estimated at 1.0. The current U.S. 10-year Treasury bond yield is 5%. Historically, the market risk premium in the U.S. stock market has been estimated as 6%. The required return of a stock or the discount rate is estimated using the Capital Asset Pricing Model (CAPM) equation.

You have compiled the projected earnings per share for 2023 for Target and Walmart in the retail store industry.

Retail Stores (Stock Symbol)

Current Stock Price $

(Oct 2023)

Projected EPS $ for 2023

Target (TGT)

105

7.58

Walmart (WMT)

155

6.46

Assume the last year (2022) as year zero. Your assignment is to value Target as of October 2023. Answer the following questions.

Question 1: What is the value of Target using the constant dividend growth model?

Question 2: What is the value of Target using the two-stage dividend growth model?

Question 3: What is the value of Target using the past 5-year average price-earnings multiple of Target?

Question 4: What is the value of Target using the forward Price-earnings multiple of Walmart?

Question 5: Would you recommend buying Target stock? How would the current and expected U.S. and global economic environment impact your decision? Explain clearly and completely.

Reference no: EM133633104

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