--%>
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 : WCR fend off takeover bid WCR fend off

    WCR fend off takeover bid: The WCR estimation ensures that a firm takes corrective action in time to correct its WC status. This ensures that the firm is always in a positive WC status. In other words, the firm will be able to pay off all its short-te

    		•
  • Q : Financing EBIT problem Rusk Inc needs

    Rusk Inc needs $50 million in new capital that it might obtain by selling bonds at par with coupon of 12% or by selling stock at $40 (net) per share. The current capital structure of Rusk consists of $300 million (face value) of 10% coupon bonds selling at 90 and 10 m

    		•
  • Q : Intrnational financer what are the

    what are the objectives of international finance

    		•
  • Q : Problem on implied exchange rate a) The

    a) The Australian firm sold a ship to a Swiss firm and gave the Swiss client an option of paying either AUS10,000 or SF15,000 in 9 months. (i) In above, the Australian firm efficiently gave the Swiss client a free option to buy up

    		•
  • Q : What is EBITDA What are Earnings before

    What are Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)?

    		•
  • Q : Explain the model of Heath Explain the

    Explain the model of Heath, Jarrow and Morton regarding tree building or Monte Carlo simulation.

    		•
  • Q : Bond price problem ABC Corp is issuing

    ABC Corp is issuing a 10-year bond with a coupon rate of 7 %. The interest rate for similar bonds is at present 9 %. Supposing annual payments, what is the current value of the bond? (Round to the closest dollar.) (a) $872 (b) $1,066 (c) $990 (d) $945.

    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 maintaining dividend Jackson

    Jackson Company has 6 million shares of common stock selling at $55 each. It also has $120 million in long-term bonds with coupon 7%, selling at 90. The tax rate of Jackson is 33%. Next year its EBIT is expected to be $25 million with a standard deviation of $7 millio

    		•
  • Q : Option Trading Strategies Explain the

    Explain the term Option Trading Strategies?

    		•