Meridian Bioscience, Inc., a life science company, develops, manufactures, and d
ID: 2717562 • Letter: M
Question
Meridian Bioscience, Inc., a life science company, develops, manufactures, and distributes diagnostic test kits primarily for certain gastrointestinal, viral, respiratory, and parasitic infectious diseases. Meridian’s stock trades on the NASDAQ under the symbol VIVO. VIVO closed on November 13, 2015 at a price of $18.99 per share.
Links to all the information needed for Question 1 is available at:
http://finance.yahoo.com/q?s=VIVO&d=t
a.Based on the constant growth model, what is the expected price? Was VIVO under-value or over-valued on November 13? To answer this assume the following:
i.The analysts’ average growth estimate for “This Year” is the best estimate of growth for the life of the company is the stock (See: http://finance.yahoo.com/q/ae?s=VIVO+Analyst+Estimates)
ii.The risk free rate is 2%
iii.The market risk premium is 6.44%
Explanation / Answer
Price as per Constant Growth Model:
P0=D1/Ke-g
Calculation of three components (D1, Ke & g):
Calculation of component “Ke”è
as per Beta asset model:
Ke=Rf+ Beta (Rm-Rf)
=2+1.06986(6.44%)
=8.889%
Calculation of component “g”è
Current year growth estimate: 3.50%
Calculation of component D1è
Cur Div= 0.80
D1 (expected div)= Cur Div + g
= $0.80+ 3.50%
= $0.8028
So Now:
Price as per Constant Growth Model:
P0=D1/Ke-g
P0=$0.8028/(8.889%-3.50%)
=$0.8028/5.389%
=$14.897
Vivo was valued at $18.99 at Nov 13 2015. So it was over-valued in comparison to its expected/ideal price $14.897.