Animal Quest company is attempting to determine the value of Wild and Free, a bu
ID: 2712318 • Letter: A
Question
Animal Quest company is attempting to determine the value of Wild and Free, a business that nurtures infant animals in preparation for their appearance in zoos. Animal Quest plans to pay in cash. AQ wishes to determine the applicable discount rate to use in the constant growth stock valuation model. Wild and free is not publicly traded. After studying the required rates of return for companies similar to wild and free that are publicly traded AQ believes that an appropriate risk premium on Wild and free's stock is about 5%. The risk free rate is currently 9%. Wild and frees dividend per share for each of the past 6 years is shown in the table below.
$6.88
Given that Wild and Free is expected to pay a dividend of $7.36 for this current year, determine the maximum cash price that Aqua Quest should pay for each share of Wild and Free.
YEAR DIVIDEND 2012$6.88
2011 $6.56 2010 $6.30 2009 $5.80 2008 $5.50 2007 $4.90Explanation / Answer
YEAR
d =7.365
YEAR
DIVIDEND Change over previous year 2,013 7.36 0.48 7.0% 2012 6.88 0.32 4.9% 2011 6.56 0.26 4.1% 2010 6.30 0.50 8.6% 2009 5.80 0.30 5.5% 2008 5.50 0.60 12.2% 2007 4.90 42.3% Average growth rate 6.0% The expected dividend growth rate for future years for Wild and free is not given. Taking the average growth rate 6.04% as future groth rate for valuation purpose. So ,d =7.365
g=6.0% K = required return = risk free rate + risk premium =9%+5% =14% So Price per share = d(1+g)/(k-g) = 7.36(1.06)/0.08 = $ 97.52 So the maximum price per share of Wild & Free is $97.52 Pls note that this calculation is pure depending on assuming the expected future dividend growth rate any change in that assumption will change the share price