Bobs Boat Corporation has pulled off a miraculous recovery. Ten years ago, it was near bankruptcy. Now the firm has just announced a $2 per share dividend for the next year, the first since the crisis hit. Analysts expect that this dividend per share will increase at the rate of 20% per share as the company completes its recovery over the next three years ($2.40 in year one, $2.88 in year two, and $3.46 in year 3). After that, dividend growth is expected to settle down to a moderate long-term growth rate of 6 %).
a) What is the intrinsic value of this stock if the appropriate discount rate for the companies in the same risk class is 10%?
b) Suppose now that stocks in the Brenda Boat Company are available. These stocks are expected to pay a dividend of $3.50 per share next year. Thereafter, dividend growth is expected to be 4 percent a year forever. Are these securities more valuable than those of the Bob Boat Company? Show your work. (assume 10% discount rate)
c) What portion of the values for the securities of the two firms calculated in parts (a) and (b) is attributed to the present value of growth opportunities? Assume the year one EPS for the Bob Corp and Brenda Corp will be $6:00 and $5:30, respectively. Show your work.