Discounted dividend valuation method

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Reference no: EM133239411

At the beginning of the year 1, Down Under Company raises $60 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) and dividends for the company are expected to be $40 million in year 1, $50 million in year 2, and $60 million in year 3, at which point the company terminates. The firm pays no taxes. Assuming straight line depreciation to zero (of 20 million per year) the firm's profits thus equal $20 in year 1, $30 million in year 2 and $40 million in year 3.

What is the value of the firms equity if the cost of equity is 6%? Use the Discounted Dividend Valuation Method and the Abnormal Earnings Valuation Method (Hint: Book Value per year is affected by the 20 million every year)

Reference no: EM133239411

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