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calculating instrinsic value of the stock

From Mayes' Financial Analysis with Microsoft Excel (4th ed.), p. 266.

1. Using the Yahoo! Finance website (http://finance.yahoo.com), get the current price and five-year dividend history for Eli Lily & Co. To gather this data, enter the ticker symbol (LLY) in the Get Quotes box at the top of the page and then click the GO button. Record the current price from this page. Now, at the left side of the quotes page, click on the Historical Prices link. To get a table of previous dividends, select the Dividends Only at the top of the table, set the Start Date to five years before today's date, and click the Get Prices button. Click the Download to Spreadsheet link at the bottom of the table to download a file with this data. You should have the choice of either saving the file or opening it directly with Excel. It is easier to let it open in Excel. Otherwise, save the .csv (comma-separated variables) file and then open it with Excel. It shouldn't need any further processing other than some formatting. You now have the dividends in a worksheet.

a. Since LLY pays dividends quarterly, calculate the quarterly percentage change in the dividends. Now, evaluate the compound quarterly growth rate of the dividends using the GEOMEAN function.

b. Now annualize the quarterly dividend growth rate.

c. Calculate the intrinsic value of the stock using a 10% required rate of return and the calculated annual growth rate. Use the sum of the most recent four dividends as D0 (aka "D" sub "zero").

d. How does the calculated intrinsic value compare to the actual market price of the stock? Use an "IF" statement to display whether the stock is undervalued, overvalued, or fairly valued. Would you buy the stock at this price?

Solution Preview

See the attached file. Thanks

Part a.
Date Dividends % ...

Solution Summary

This post illustrates how to calculate the intrinsic or fundamental value of a stock.