You were hired as a new analyst to project the value of the ICER Company, a
new sustainable energy firm.
Today is June 2nd 2022. The ICER Company just paid an annual
dividend yesterday (on June 1st, 2022) of $4.00 per share. You expect the
company's dividend to grow at 15% for three years (2023, 2024, 2025).
Following this, you expect the company to grow at a 10% rate for three years
(2026, 2027, 2028). Finally, you expect the company to grow at a constant
rate of 5% thereafter. The ICER Company.
The company's equity beta is 2.0, the risk-free rate is 3%, and the expected
return to the market is 9%. Assume the CAPM holds.
1. According to CAPM, what is the appropriate discount rate?
2. What should the price per share of ICER be, according to the dividend
discount model? (Hint: what is the present value of the future expected
cashflows?)
3. If the current market value of the ICER Company is $88.88, what would
you recommend?
HOLD! It is fairly valued
BUY! It undervalued
SELL! It is overvalued
There is not enough information!