--%>
Assignment Help - homework help

Problem on price share and stock valuation

Brittney and Kim Wan Sun have successfully launched a successful talent agency, ABC. They expect the firm’s earnings and dividends to grow by 20% annually for the next 10 years and they establish a strong base and to grow at a constant 5% per year thereafter. ABC uses a 12% discount rate. Dividends are paid annually, for computational convenience. The next annual dividend of $10 will be paid exactly one year from today.

a. What is the price of a share of ABC?

b. Suppose Kofi market insight analysts thing ABC can only grow at 20% for 5 years, not 10, after which growth will stay at 5% indefinitely. What value would the Kofi analysts put on a share of ABC? Informally, is the stock valuation very sensitive to the length of the initial growth period?

c. Suppose another valuation service – Values R Us, believes that ABC forecasts are good in the near term (they believe that dividends will grow at 20% for 10 years as stated) but less good in the long term – they predict that dividends will grow at 3% rather than 5% indefinitely. What is their valuation of a share of ABC? Informally, is the stock valuation very sensitive to the long run growth rate?

   Related Questions in Corporate Finance

  • Q : Why required return cannot computed by

    Why can we not compute the required return (Ke) by the Gordon-Shapiro model [P0 = Div0 (1+g) / (Ke – g)] in place of using the CAPM? As we identify the current dividend (Div0) and the current share price (P0), we can acquire the growth rate of the dividend by th

    		•
  • Q : How you can predict future evolution of

    Could we suppose that, as we cannot predict the future evolution of the value of shares, a good estimation would be to consider this constant during the next five years?

    		•
  • Q : Who introduced put–call parity Who

    Who introduced put–call parity?

    		•
  • Q : What is Box Spread Box Spread: This is

    Box Spread: This is another strategy which seeks to exploit the arbitrage opportunities which are available in the market. In case that the options are correctly priced, this strategy would earn only the risk free rate. However, due to existence of im

    		•
  • Q : Problem on EBIT ABC Corporation stock

    ABC Corporation stock sells at $27 per share and its dividend per share is $1.20. ABC has price-earnings ratio of 16. The company contains $40 million worth of bonds, selling at par, with 8.5% coupon. The EBIT of ABC is of $12 million and its tax rate is 30%. Calculat

    		•
  • Q : Is it possible to use a constant WACC

    Is this possible to use a constant WACC in the valuation of a company along with a changing debt?

    		•
  • Q : CAPM-Project Evaluation and Risk

    UCD Vet Products – a hypothetical publicly traded corporation (UCDV) — is considering investing in a new line of equine DNA analysis technology for race horse breeders. The project will yield the net cash flows listed in the table below. Assume that this p

    		•
  • Q : Explain modern quantitative

    Explain modern quantitative methodology for portfolio selection.

    		•
  • Q : Real estate problem Eric Rowan is

    Eric Rowan is planning to buy a house for $155,000 by borrowing money at the rate of 9%. He expects to rent the house for 5 years, collecting $20,000 annual rent in advance each year. He thinks that he can sell the house for $175,000 after five years. Fulton has incom

    		•
  • Q : Road King Trucks Project I want to know

    I want to know how much do you charge for doing the project?

    		•