BUS 401 Week 3 Assignment | ashford university
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BUS 401 Week 3 Assignment | ashford university
Section 3: Dividend Analysis and Preliminary
Valuation [WLOs: 1, 4] [CLOs: 1, 2, 4]
In the Section 3: Dividend Analysis and Preliminary Valuation
assignment, you will compute the of the company’s stock value based on
historical dividend data for your company and a market-based equity rate of
return. In this analysis, you will use the constant growth formula to compute
two estimates of the stock price, a high-end value and a low-end value.
Analysts frequently assess the stock value using a range of values, based on
reasonable assumptions for a high-end and a low-end range.
Once you have calculated two stock values, you will compare the
company’s calculated values compared to the current market price of the stock.
This comparison will help you determine if the stock is currently under-valued
or over-valued, and will help you determine your recommendation of buy, hold,
or sell. Analysts prepare value estimates based on historical data for the
company as well as an understanding of expected future equity rates of return.
It is important to understand that the constant growth formula provides an
estimate of value, and analysts, like all humans, can be both right and wrong.
The inputs used in the formula will greatly impact the value conclusion.
Prepare:
Prior to beginning work on this assignment,
·
Complete both learning
activities for this week.
·
Review Chapters 4 and
5 of the textbook.
·
Review the Week 3 Model Assignment (Links to an external site.).
·
Watch the following
video:
Write:
In your paper, address the following five parts in a Word
document:
Part 1: Dividend
Analysis (two to three paragraphs):
·
Create
a table that illustrates the annual dividends per share paid by your
selected company over the past 10 years. If the company has not paid dividends
for 10 years, include as many years as available.
o Calculate the growth in annual dividends per
share each year and include this annual growth rate in your
table.
§ To find the dividends your company has paid in
the past 10 years, review the BUS401 |Picking a Company that Pays Dividends (Links to an
external site.) video from Week
1.
o Calculate the average dividend growth rate
over the following periods:
§ the most recent 10 years,
§ the most recent 5 years, and
§ the most recent 3 years.
o Summarize the trend in the dividend
growth rates.
§ Have the dividend growth
rates increased or decreased? By how much? Has the increase or decrease
been steady or varied from year to year?
o Determine two distinct estimates of the future
dividend growth rate for this company: a high-end growth rate
and a low-end growth rate. You are to choose these growth rates based on
what is reasonable from the data you have on the company’s dividend growth in
prior years, as presented in your table. The two future dividend growth
rates can be any of following:
§ the most recent year growth rate;
§ the average growth rate over the
10-year period;
§ the average growth rate over the most
recent 5 years;
§ the average growth rate of the most recent
3 years; or
§ a growth rate you select that is reasonable,
given the 10-year, 5-year, and 3-year averages, as well as the recent year
growth rates.
§ NOTE: Both dividend growth rates must be lower
than the required rate of return used in the constant growth formula. See Part
2 below for the required rate of return to use in the constant growth formula.
§ Justify the determined the high-end dividend
growth rate and low-end dividend growth rates for your company. In your justification,
provide a least two financial facts from your Week 1 and Week 2 assignments to
support your determination.
Part 2: Preliminary
Valuation: (two to three
paragraphs)
·
Calculate the stock
price for your selected company using the constant growth formula and the
low-end dividend growth rate you determined in Part 1. Show
all calculations for this estimated stock price using the low-end
dividend growth rate.
o For the required rate of return (r), use the following assumptions:
§ For a large capitalization company (greater
than $10.0 billion in market capitalization) use 10.0%.
§ For a mid-cap company (between $2.0
billion and $10.0 billion in market capitalization) use 12.0%.
§ For a small-cap company (less than $2.0
billion in market capitalization) use 15.0%.
o Show your calculations.
·
In a similar manner,
calculate another estimate of the stock price for your selected company using
the constant growth formula and the high-end dividend growth rate.
o Use the same assumptions for the required rate
of return (r) that you used for
the low-end stock price, other than using the high-end dividend growth
rate.
o Show your calculations.
·
Compare each of
the two stock prices you just calculated to the current stock
price per share of the company.
o State whether each constant growth stock price
(low-end and high-end) is above or below the current price.
o State whether each constant growth stock price
(low-end and high-end) indicates if the stock price is currently under-valued
or over-valued in the market.
·
Determine your concluded
stock value, based on the two calculations using the constant growth formula.
·
Justify your
conclusion of value for your stock, using either the high-end stock price or
the low-end stock price from the constant growth formula. Include least
two financial facts from your Week 1 and Week 2 analyses.
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The Section 3: Dividend Analysis and Preliminary Valuation paper
·
Must be three to four
double-spaced pages in length including any tables or calculations (but not
including title and references pages) and formatted according to APA Style (Links to
an external site.) as outlined in
the Writing Center’s APA Formatting for
Microsoft Word (Links to an external site.) resource).
·
Must include a
separate title page with the following:
o Title of paper in bold font
§ Space should be between title and the rest of
the information on the title page.
o Student’s name
o Name of institution (The University of Arizona
Global Campus)
o Course name and number
o Instructor’s name
o Due date
·
Must utilize academic
voice. See the Academic
Voice (Links to an external site.) resource for additional guidance.
·
Must include a
separate references page that is formatted according to APA Style as outlined
in the Writing Center. See the APA: Formatting Your References List (Links to an external
site.) resource in the
Writing Center for specifications.
·
Must cite where the
financial statement information comes from (i.e., Mergent)
o For help citing the information from Mergent,
see the BUS401: Principles of Finance Research Guide.
Note: Since this is Section 3 of the Week 5 final project, there
is no need for an introduction paragraph.