On January 1, 2017, John Smith started to work as a financial analyst in the equity department of the Traveler Mutual Funds. As an entry level financial analyst, his job is to help value the stocks assigned by the fund manager, Ben Ashford. On March 19, a news about Ford Motor Company caught Mr. Ashford’s eyes. Ford’s redesigned F-150 won top consumer reports honor. This is Ford’s first win in the category since 1999 and its first overall top pick honor since 2012. Also, the low oil price and favorable car loans have boosted car sales in U.S. Mr. Ashford is considering whether Traveler should increase the holding of Ford. Hence, Mr. Ashford would like John to analyze the intrinsic (fundamental) value of Ford’s stock to help him decide whether the fund should buy Ford’s stocks more.
John recalled that he had learned the dividend growth model in his finance course to estimate the intrinsic value of a stock. To implement the dividend growth model, he first needed to know the current dividend payment of Ford. Second, he needed to estimate the growth rate of dividends forever. Finally, he needed to estimate the required rate of return of the stock based on the risk level of the stock. John next finished the following jobs:
1. Browsed Yahoo Finance and found the symbol for Ford’s stock.
2. On Yahoo Finance, John checked Ford’s dividend payment for the first quarter of 2017 and assume that the dividend payments will stay the same for the remaining three quarters.
3. On Yahoo Finance, John checked “Growth Est” under “Analyst Estimates”. He thought that the growth rate for past and next 5 years for Ford could help him estimate the growth rate of dividends forever.
4. Based on the risk level of Ford’s stock, he estimated the required rate of return of the stock was around 15%.
5. Based on the estimates he obtained from 2 through 4, John input the estimates to the dividend growth model to estimate the intrinsic value of the Ford’s stock.
6. Since John knew that the estimated intrinsic value of a stock based on the dividend growth model is very sensitive to the estimated growth rate of dividends. Hence, he did the sensitivity analysis to see how the intrinsic value will be if the estimated growth rate changes.
After John finished all the jobs above, he wrote a memo to Mr. Ashford to summarize his analysis and results.
The bolded parts above are what I need help with