Computation of value of stock and stock prices

Reference no: EM1311564

Computation of value of stock.

GROWTH, Inc.'s next year earning is expected to be $4 per share. The company pays out half of its earning as dividend. Both dividends and earnings are expected to grow by 10% a year for the first 5 years, and grow by 5% a year indefinitely thereafter. STABLE, Inc. is like GROWTH in all respects except that its growth will stop after year 5. In year 6 and afterward, it will pay out all earnings as dividends. Both companies' expected returns are 8%.

(a) What are the stock prices for each company?

(b) What are the P/E ratios and PEG ratios for each company? Assuming the average growth rates for GROWTH and STABLE are 6% and 3.33%, respectively.

(c) Which stock would you buy using the PEG rule? Now, suppose the stock prices computed in (a) are the actual traded prices. However, if you have assumed that both companies' earnings will grow by 5% a year indefinitely in computing the fair values, which stock should you buy?

Reference no: EM1311564

Questions Cloud

Find the acceleration of the box : As part of the safety investigation, two 1400 {rm kg} cars travelling at 23 {rm m/s} are crashed into different barriers. Find the average forces exerted on (a) car that hits a line of water barrels and takes 1.7 {rm s} to stop, and (b) car that hits..

Computing economic cost : What is your economic cost of buying a ticket? What is your economic cost of attending the game (once you already bought the ticket)?

Finding clinic’s required rate of return : Find how much should the Atlantic Medical Clinic be willing to pay for the new computer system if the clinic required rate of return

What is the magnitude of the counter clockwise force : A laboratory ultracentrifuge is designed to produce a centripetal acceleration of 5.0 x 10^6 g at a distance of 4.00cm from the axis. What angular velocity in rev/min is necessary.

Computation of value of stock and stock prices : Computation of value of stock and find What are the stock prices for each company

Calculate the ampere-hour rating of the battery : Use approximate calculations assuming constant current during the output pulse. Calculate the ampere-hour rating of the battery so it lasts for five years.

Grade point distribution : What is Peter's median grade point at graduation? What is the shape of the grade point distribution?

Computing the optimal level of inputs : Find the optimal level of inputs L* and K* that minimize the cost of producing Q0. What is the cost of production associated to L* and K*?

How fast does it move after the bullet emerges : Therefore of his observations, Ole Roemer concluded that eclipses of Io by Jupiter were delayed by 22 min throughout a six-month period as the Earth moved from the point in its orbit where it is closest to Jupiter to the diametrically opposite point ..

User Account

All Pages