Can you assist me getting started with this project?
Your company is looking to make the following annual dividend payments over the next 4 years, commencing 1 year from today: $10, $14, $7 & $2. After this time the company expects to maintain a constant growth rate of dividends of 5% indefinitely.
Problem 1. With a required rate of return equal to 4 times the current return on government bonds (currently 3.5%), what is the intrinsic value of the company's shares today?
Problem 2. How do you determine of the shares are overvalued or undervalued?
Problem 3. What assumptions are you making about a shareholder investment in the company in order to justify the calculated intrinsic value in part 1?
Problem 4. What would be the difference in your answer to part 1 if the required rate of return of the shares was only equal to only 2 times the return on government bonds? Show calculations.
Problem 5. Explain your answer to part 4 in terms of the relationship between price and yield.