In chapter 9, we learned how the dividend-discount model can be used to determine the value of a firm’s equity, or the current price of a share of stock. Use this model to estimate the value of a share of your firm’s stock and compare this estimate to the current market value. To do this, you will need to do the following:
1 – Estimate Nordstrom stock price using the dividend-discount model: Use an investment source and find: 1) the current dividend; 2) analyst’s estimate growth rate for the next five to ten years; 3) an alternative growth estimate using the firm’s historical growth rate or the formula “g=ROE x b”.
2 – Use your estimate of the cost of equity in the WACC for the rE part of your formula: Combine the above information into the dividend-discount model (DDM).
3 – Compare your result to the current market price of your firm’s stock. Provide analysis and an explanation of how they compare and explain any differences you observe.