Tom Smithfield is valuing the stock of a food-processing business. He feels confident explicitly projecting earnings and dividends to three years (to t = 3). Other information and estimates are as follows:
Required rate of return = 0.09.
Average dividend payout rate for mature companies in the market = 0.45.
Industry average ROE = 0.10. E3 = $ 3.00.
Industry average P/ E = 12.
On the basis of this information, answer the following questions:
A) Compute terminal value (V3) based on comparables.
B) Contrast your answer in Part A to an estimate of terminal value based on the Gordon growth model.