Casey Hyunh is trying to value the stock of Resources Limited. To easily see how a change in one or more of her assumptions affects the estimated value of the stock, she is using a spreadsheet model. The model has projections for the next four years based on the following assumptions.
- Sales will be $300 million in Year 1.
- Sales will grow at 15% in Years 2 and 3 and 10% in Year 4.
- Operating profits (EBIT) will be 17% of sales in each year.
- Interest expense will be $10 million per year.
- Income tax rate is 30%.
- Earnings retention ratio will stay at 0.60.
- The per-share dividend growth rate will be constant from Year 4 forward, and this final growth rate will be 200 bps less than the growth rate from Year 3 to Year 4.
The company has 10 million shares outstanding. Hyunh has estimated the required return on Resources’ stock to be 13%.
Q. Estimate the value of the stock at the end of Year 4 based on the foregoing assumptions.
Ans- 61.76. Please explain.
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