Week 3 assignment

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Section 3: Dividend Analysis and Preliminary Valuation [WLOs: 1, 4] [CLOs: 1, 2, 4]
In the Section 3: Dividend Analysis and Preliminary Valuation assignment, you will compute the
of the company’s stock value based on historical dividend data for your company and a market-
based equity rate of return. In this analysis, you will use the constant growth formula to
compute two estimates of the stock price, a high-end value and a low-end value. Analysts
frequently assess the stock value using a range of values, based on reasonable assumptions for
a high-end and a low-end range.
Once you have calculated two stock values, you will compare the company’s calculated values
compared to the current market price of the stock. This comparison will help you determine if
the stock is currently under-valued or over-valued, and will help you determine your
recommendation of buy, hold, or sell. Analysts prepare value estimates based on historical data
for the company as well as an understanding of expected future equity rates of return. It is
important to understand that the constant growth formula provides an estimate of value, and
analysts, like all humans, can be both right and wrong. The inputs used in the formula will
greatly impact the value conclusion.
Prior to beginning work on this assignment,
• Complete both learning activities for this week.
• Review Chapters 4 and 5 of the textbook.
• Review the Week 3 Model Assignment (Links to an external site.).
• Watch the following video:
(Links to an external site.)
BUS401 – Constant Growth Formula (Links to an external site.)

In your paper, address the following five parts in a Word document:
Part 1: Dividend Analysis (two to three paragraphs):
• Create a table that illustrates the annual dividends per share paid by your selected
company over the past 8 years. If the company has not paid dividends for 8 years,
include as many years as available.
o Calculate the growth in annual dividends per share each year and include this
annual growth rate in your table.
▪ To find the dividends your company has paid in the past 8 years, review
the BUS401 |Picking a Company that Pays Dividends (Links to an external
site.) video from Week 1.
o Calculate the average dividend growth rate over the following periods:
▪ the most recent 8 years,
▪ the most recent 5 years, and
▪ the most recent 3 years.
o Summarize the trend in the dividend growth rates.
▪ Have the dividend growth rates increased or decreased? By how much?
Has the increase or decrease been steady or varied from year to year?
o Determine two distinct estimates of the future dividend growth rate for this
company: a high-end growth rate and a low-end growth rate. You are to choose
these growth rates based on what is reasonable from the data you have on the
company’s dividend growth in prior years, as presented in your table. The two
future dividend growth rates can be any of following:
▪ the most recent year growth rate;
▪ the average growth rate over the 8-year period;
▪ the average growth rate over the most recent 5 years;
▪ the average growth rate of the most recent 3 years; or
▪ a growth rate you select that is reasonable, given the 8-year, 5-year, and
3-year averages, as well as the recent year growth rates.
• NOTE: Both dividend growth rates must be lower than the
required rate of return used in the constant growth formula. See
Part 2 below for the required rate of return to use in the constant
growth formula.
▪ Justify the determined the high-end dividend growth rate and low-end
dividend growth rates for your company. In your justification, provide a
least two financial facts from your Week 1 and Week 2 assignments to
support your determination.
Part 2: Preliminary Valuation: (two to three paragraphs)
• Calculate the stock price for your selected company using the constant growth formula
and the low-end dividend growth rate you determined in Part 1. Show all calculations
for this estimated stock price using the low-end dividend growth rate.
o For the required rate of return (r), use the following assumptions:
▪ For a large capitalization company (greater than $10.0 billion in market
capitalization) use 10.0%.
▪ For a mid-cap company (between $2.0 billion and $10.0 billion in market
capitalization) use 12.0%.
▪ For a small-cap company (less than $2.0 billion in market capitalization)
use 15.0%.
o Show your calculations.
• In a similar manner, calculate another estimate of the stock price for your selected
company using the constant growth formula and the high-end dividend growth rate.
o Use the same assumptions for the required rate of return (r) that you used for
the low-end stock price, other than using the high-end dividend growth rate.
o Show your calculations.
• Compare each of the two stock prices you just calculated to the current stock price per
share of the company.
o State whether each constant growth stock price (low-end and high-end) is above
or below the current price.
o State whether each constant growth stock price (low-end and high-end)
indicates if the stock price is currently under-valued or over-valued in the
• Determine your concluded stock value, based on the two calculations using the constant
growth formula.
• Justify your conclusion of value for your stock, using either the high-end stock price or
the low-end stock price from the constant growth formula. Include least two financial
facts from your Week 1 and Week 2 analyses.
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Don’t know what to ask the tutor? How about…
• I don’t understand how to calculate the dividend growth rate. Could you explain it to me?
• I am struggling with computing the stock value. Can you help me?
• I don’t understand the constant growth formula. Could you walk me through it?
The Section 3: Dividend Analysis and Preliminary Valuation paper
• Must be three to four double-spaced pages in length including any tables or calculations
(but not including title and references pages) and formatted according to APA Style
(Links to an external site.) as outlined in the Writing Center’s APA Formatting for
Microsoft Word (Links to an external site.) resource).
• Must include a separate title page with the following:
o Title of paper in bold font
▪ Space should be between title and the rest of the information on the title
o Student’s name
o Name of institution (The University of Arizona Global Campus)
o Course name and number
o Instructor’s name
o Due date
• Must utilize academic voice. See the Academic Voice (Links to an external site.) resource
for additional guidance.
• Must include a separate references page that is formatted according to APA Style as
outlined in the Writing Center. See the APA: Formatting Your References List (Links to an
external site.) resource in the Writing Center for specifications.
• Must cite where the financial statement information comes from (i.e., Mergent)
o For help citing the information from Mergent, see the BUS401: Principles of
Finance Research Guide (Links to an external site.).
Note: Since this is Section 3 of the Week 5 final project, there is no need for an introduction

Section 3: Dividend Analysis and Preliminary Valuation [WLOs: 1, 4] [CLOs: 1, 2, 4]

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