--%>
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 : Liquidity Ratios Liquidity Ratios :

    Liquidity Ratios: Such ratios comprise the Current Ratio and the Quick Ratio or the acid test ratio. Liquidity ratios demonstrate the Liquid position of a company in the short term that is the capability of a firm to pay its obligations in short term.

    		•
  • Q : Explain method to analyze and to value

    Are there any methods to analyze and to value seasonal businesses?

    		•
  • Q : Explain Value Chain Value Chain : The

    Value Chain: The value chain is a theory from business management that was first described and popularized Michel Porter in his 1985 best seller, Competitive Advantage: Creating and Sustaining Superior Performance.

  • 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 : Provide three examples of mutually

    provide three examples of mutually exclusive projects?

    		•
  • Q : Finance A middle income worker, with a

    A middle income worker, with a dependent spouse older than the normal retirement age, retired in January 2004. In the year prior to retirement, her gross monthly earnings were $1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her

    		•
  • Q : Yield to maturity problem Jenny is

    Jenny is looking to invest in some 5-year bonds which pay annual coupons of 6.25 % and are presently selling at $912.34. What is the present market yield on these bonds? (Round to the closest Answer.) (1) 9.5%  (2) 8.5%  (3) 6.5%  (4) 7.5%

  • Q : Financial problem regarding acquistion

    My Company paid an extremely higher price for the acquisition of other company; the price was recommended through the valuation of an investment bank. Now we have financial problems. So is there any way to make this bank legally responsible for such situation?

    		•
  • Q : Llustrate illiquidity risk and small

    My investment bank told me that beta given by Bloomberg incorporates the illiquidity risk and small cap premium since Bloomberg does well-known Bloomberg adjustment formula. Is it true?

    		•
  • Q : Who explained the high-peak/fat-tails

    Who explained the high-peak/fat-tails?

    		•