The Pancake Corporation Recently Paid A 300 Dividend And Is

The Pancake Corporation Recently Paid A 300 Dividend And Is Expected

The Pancake Corporation recently paid a $3.00 dividend and is expected to grow at 4.5% forever. Investors generally require an expected return of at least 8% before they'll buy stocks similar to those of Pancake. a. What is Pancake's intrinsic value? Round the answer to two decimal places. $ b. Is it a bargain if it's selling at $71 a share? (Assume that a share is worth buying when its estimated value is greater or equal to 120% of the market price.)

Paper For Above instruction

The intrinsic value of a stock is fundamental in assessing whether a stock is undervalued or overvalued in the market. To determine the intrinsic value of Pancake Corporation, we apply the Gordon Growth Model (Dividend Discount Model for perpetuities with growth), which is expressed as:

Intrinsic Value (P) = Dividend (D1) / (Required Return (r) - Growth Rate (g))

where D1 is the dividend expected next year, r is the required rate of return, and g is the dividend growth rate.

Given the data: the last dividend, D0, was $3.00, and with a growth rate of 4.5%, D1 can be calculated as:

D1 = D0 x (1 + g) = $3.00 x (1 + 0.045) = $3.00 x 1.045 = $3.135

The required rate of return, r, is 8%, or 0.08, and the growth rate g is 4.5%, or 0.045.

Plugging these into the Gordon Growth Model:

Intrinsic Value = $3.135 / (0.08 - 0.045) = $3.135 / 0.035 = $89.57

Thus, the intrinsic value of Pancake’s stock is approximately $89.57 per share.

To determine if the stock is a bargain at its current market price of $71 per share, we consider the hypothesis that a stock is attractive if its estimated value is greater than or equal to 120% of its market price.

Calculate 120% of the market price:

120% x $71 = 1.20 x $71 = $85.20

Since the intrinsic value ($89.57) exceeds $85.20, the stock qualifies as a bargain under this criterion.

In conclusion, based on fundamental valuation models, Pancake’s stock is undervalued at $71, considering the intrinsic value surpasses the threshold for a bargain, and represents a lucrative buy for investors seeking stocks with a margin of safety.

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