Joel Williams follows Sonoco Products Company (NYSE:SON), a manufacturer of paper and plastic packaging for both consumer and industrial use. SON appears to have a dividend policy of recognising sustainable increases in the level of earnings with increases in dividends, keeping the dividend payout ratio within a range of 40% to 60%. Williams also notes: SON's most recent quarterly dividend (ex-dividrnf date:15 August 2007) was $0.26=$1.04 per year. SON'S forecasted dividend growth rate is 6.0% per year. With a beta of 1.13, given an equity risk premium (expected excess return of equities over the risk free rate, E(RM)-RF of 4.5% and a risk free rate (RF) of 5%, SON'S required rate of equity is r=RF + beta [E(RM)-RF] =5.0 + 1.13(4.5) = 10.1%, using the CAPM. Williams believes the Gordon Growth Model may be an appropriate model for valuing SON. (a) Calculate the Gordon Growth Model value of SON stock (b) The current market price of SON stock is $30.18. Using your answer in (i), judge whether SON stock is fairly valued , undervalued or overvalued
Joel Williams follows Sonoco Products Company (NYSE:SON), a manufacturer of paper and plastic packaging for both consumer and industrial use. SON appears to have a dividend policy of recognising sustainable increases in the level of earnings with increases in dividends, keeping the dividend payout ratio within a range of 40% to 60%. Williams also notes: SON's most recent quarterly dividend (ex-dividrnf date:15 August 2007) was $0.26=$1.04 per year. SON'S
r=RF + beta [E(RM)-RF] =5.0 + 1.13(4.5) = 10.1%, using the
(a) Calculate the Gordon Growth Model value of SON stock
(b) The current market price of SON stock is $30.18. Using your answer in (i), judge whether SON stock is fairly valued , undervalued or overvalued
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