E-Health Ltd has invented a new preventative health device that links with a standard mobile phone. The device enables key vitals of the mobile phone user to be measured, relays this information to a central database and returns health advice via the mobile phone to the client. The technology underlying this device is innovative and novel and has therefore been patented by E-Health. The company has decided that for the next two years it will reinvest all its earnings from other company products into rolling out the new product. Earnings per share were $2 in the past year and have been growing at an average rate of 9%. At the end of year 3, the company will begin paying a dividend per share of $2.50. This dividend is expected to grow very quickly at a rate of 30% in years 4 and 5 while the company still has a monopoly in the market. The rate of dividend growth, however, is expected to slow in year 6 to 20% and in year 7 to 10% until finally, in year 8, growth is expected to a more normal, constant growth of 4% as competitors develop and begin marketing alternative products. The required return on E-Health shares is estimated to be 15% and E-Health shares are currently trading at $21.05. Your task is to estimate the intrinsic value of E-Health shares and advise your client on whether the shares are currently overpriced, fairly-priced or underpriced in the market. Limit your answer to one A4 page.
Paper#33346 | Written in 18-Jul-2015Price : $27