Use the following information to value Badger-Meter Corp. using the discounted d

Question

Use the following information to value Badger-Meter Corp. using the discounted dividends model. The observed share price on December 1, 2017 was $45.75 per share. The most recent 10-k was dated Nov. 30, 2017.

• WACC (after-tax) is 8% and the estimated cost of equity is 11% for Badger Meter.

• All dollar amount items are stated in thousands of dollars.

• Shares of Common Stock outstanding (in thousands) is 28,820

• The Terminal Value perpetuity begins in 2021 and dividends are assumed to grow at 3.4% annually.

Value the shares as at Nov. 30, 2017 using the Discounted Dividends Model

Badger Meter (45.75) Total Revenue Net Income Interest Bearing Debt Retained Earnings Total Stockholder Equity Total Cash Flow From Operating Activities Capital Expenditures Dividends Paid Forecast Perp 2017 2018 2019 20202021 364,768 377,698 393,761 29,678 25,938 32,295 86,205 91,986 90,515 56,300 170,320.00 196,560.00 35,735 35,831 56,185 61,240 (12,332) (19,766) 10,596) (15,400) 10,633 1,261 12,461 14,600

Explanation / Answer

Present Value of perpetual dividends = [Dividends/(Cost of Equity - Growth)]* ( 1/(1+Cost of Equity)3
= [14,600/(11% -3.34%)]*( 1/(1+11%)3 = 140,465.7127

Present Value of Dividends from Year1- Year 3 = D1/(1+Cost of Equity) + D2/(1+Cost of Equity)2 + D3/(1+Cost of Equity)3 = 10,633/1.11 + 11,261/1.112 + 12461/1.113 = 27,830.3353

Total Value = PV of high growth + PV of stable growth = 140,465.7127 + 27,830.3353 = 168,296.048

Value of shares = Total value/ no of shares = 168,296.048/28,820 = 5.839

Best of Luck. God Bless

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