You are trying to establish a value for the equity of a small firm. Recently, the EPS of the firm was reported as $1.94. You expect the earnings to grow at 25% per year for the next six years.
After that, you expect earnings growth should level-off to a sustainable rate of 2.25% per year. If 9% is a reasonable required return on the investment, estimate a plausible price estimate for a share.
Consider the example above. Again, you are interested in projecting a value for this small firm. But, as an alternative approach, you are considering using a P/E ratio to project the terminal value of the venture.
Therefore, your estimates of EPS for the next six years will remain the same. But, you will use an estimated P/E Ratio for this industry of 11.30 to compute the terminal value of the stock.
In this case, what is the estimate for the value of the security?