You’re currently a buy-side analyst working for a big asset manager. You believe that investing in Disney (DIS) presents interesting opportunities for your fund: the share price is currently $118.80, earnings per share (last 12 months) are $4.65, and dividends per share are $1.32. While there is no consensus for the correct price of the stock, analysts agree that the appropriate discount rate for Disney is 12%.
A sell-side analyst at a prestigious investment bank estimates that the stock should trade next year for $121.33, and that dividends should grow by 15%. Using this information, compute the fundamental value of the stock. What do you think her recommendation would be?
A buy-side analyst at a big mutual fund has a different opinion. He thinks that next year dividend will be $1.4 per share, while the dividend in two more years will reach $1.7 per share, at which point the stock could be sold for $135. Using this information, compute the fundamental value of the stock. What do you think his recommendation would be?
A seasoned manager at a hedge fund specializing in growth strategies thinks differently. He believes that for a mature stock such as Disney you should use the Gordon growth model (GGM).
According to the Gordon growth model, which implicit growth rate of dividends is consistent with the current observed share price?
Which ROE does the market estimate in that case?