Animal Quest company is attempting to determine the value of Wild and Free, a bu
ID: 2712349 • 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
a. Calculate the stock price of W&F resulting from a 2% decrease in it's dividend growth rate from that shown in 2007-2012. Provide one possible cause for this change.
b.Calculate the stock price of W&F resulting from a 4% decrease in it's RISK PREMIUM. Provide one possible cause for this change.
YEAR DIVIDEND 2012$6.88
2011 $6.56 2010 $6.30 2009 $5.80 2008 $5.50 2007 $4.90Explanation / Answer
YEAR
d =6.88
d =6.88
YEAR
DIVIDEND Change over previous year 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 35.3% Average growth rate 5.9% The expected dividend growth rate for future years for Wild and free is not given. Taking the average growth rate 5.9% of 2007-12 period less 2% = 3.9% as future groth rate for valuation purpose. So ,d =6.88
g=3.9% K = required return = risk free rate + risk premium =9%+5% =14% So Price per share = d(1+g)/(k-g) = 6.88*1.039/0.101 = $ 70.78 So the price per share of Wild & Free is $70.78 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 risk premium reduced by 4% , other things remain as above So ,d =6.88
g=3.9% K = required return = risk free rate + risk premium =9%+1% =10% So Price per share = d(1+g)/(k-g) = 6.88*1.039/0.061 = $ 117.19 So the price per share of Wild & Free is $117.19 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 The risk premium of Wild & Free may reduce if the company is showing good earnings more than expected rate without much fluctuation and the perception of the company becomes good with the investors.