Question #1: Equity Valuation
(a) An analyst gathers the following data for Live Nation Entertainment (LYV):
Expected Dividends per share in 2018 (d1) $1.55
Expected Return on the Market [E(rM)] 11%
Risk-Free interest rate (rf) 4%
Stock’s beta 1.6
Return on Equity (ROE) 14%
Dividend Payout Ratio 0.40
Stock’s market price as of April 6, 2017 $28.35
Use the constant growth dividend discount model to calculate the stock’s intrinsic value (V0). Would the analyst recommend that investors purchase Live Nation Entertainment stock?
(b) Procter & Gamble (PG) recently paid a dividend payment of $2.10 (d0 = $2.10). A research analyst forecasts that PG dividends will grow at a rate of 7% for the next four years. At the end of four years, dividends will grow at a slower rate of 3% per year indefinitely. Assume that the required rate of return is equal to 10%. Calculate the intrinsic value of a share of PG stock today.