A Fund Manager is going to invest $10,000,000. He is interested in CL3 Ltd and values CL3
Ltd using the dividend discount model (DDM). He gathers the following information:
• CL3’s earnings are expected to grow 17% per year over the next three years before
stabilizing at an annual growth rate of 9%.
• CL3 paid cash dividend of $22,470 this year.
• Number of outstanding shares: 13,000.
• CL3 Ltd will maintain the current dividend payout ratio.
• CL3’s beta is 1.25.
• The government bond yield is 6%.
• The market equity risk premium (i.e. rm - rf) is 5%.
a) Calculate the value of a share of CL3’s common stock using the two-stage DDM.
b) Market price is $75 per share. Based on answer in (a), what would the Fund Manager do ?Why ?