Hey,
concerning a stock valuation (applying the PVGO method), I am struggling with a pretty easy question but I am just confused because of the following scenario:
Stock Price = 130$
Current Dividend: 14$
Discount Rate = 13%
Growth Rate = 9%
Payout Ratio = 40%
ROE = 18%
Actually, the growth rate should be calculated by multiplying a company's ROE with the Retention Rate which leads to (18%*60%) a g = 10,8%.
Which growth rate am I supposed to use for further calculations to calculate whether the stock price is over- or undervalued.
I used the growth rate of 9% to calculate the DIV1 and then, I used the growth rate of 10,8% to calculate the stockprice P = DIV1/ (k-g); k = DIV1/P0 + g
What is your opinion on this exercise. I also considered that there might be a mistake in the question but I haven't received any feedback so far.
Many thanks
Without even doing the calculations, it's obviously undervalued. EPS/r alone is more than $130.
If you want to calculate it, Price=EPS/r+PVGO. and PVGO=[bEPS(ROE-r)] / r(r-bROE) with b as retention ratio.
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