Response to the following problem:
Cavanaugh Construction specializes in designing and building custom homes. Business has been excellent, and Cavanaugh projects a 10% growth rate for the foreseeable future. The company just paid a $3.75 dividend. Comparable stocks are returning 11%.
a)w hat is the intrinsic value of Cavanaugh stock?
b) Does this seem reasonable? Why or why not?
c) if Cavanaugh's growth rate is only 8.5% and comparable stocks are really returning 12%, what is Cavanaugh's intrinsic value?
d) Do these relatively small changes in assumptions justify the change in the intrinsic value? Why or why not?