Reference no: EM133016039

1. An analyst produces the following series of annual dividend forecasts for company D: Expected dividend (end of) year t+1 = €10; Expected dividend (end of) year t+2 = €20; Expected dividend (end of) year t+3 = €10. The analyst further expects that company D's dividends will grow indefinitely at a rate of 2 percent after year t+3. Company D's cost of equity equals 10 percent. Under these assumptions, the analyst's estimate of company D's equity value at the end of year t is

A. €128.93

B. €120.22

C. €108.26

D. €36.36

2. An analyst produces the following set of forecasts for company E:

Year t+1 Year t+2. Year t+3

Profit or loss €100 €120 €60

Ending book value of €1,030 €1,060 €1,000 business assets

Ending book value of debt €720 €740 €800

At the end of year t, company E's book values of business assets and debt are €1,000 and €700, respectively. The analyst expects that after year t+3, company E will reach a competitive equilibrium, i.e., will earn zero abnormal profit. Company E's cost of equity is 10 percent. Under these assumptions, the analyst's estimate of company E's equity value at the end of year t is

A. €307.96
B. €443.20
C. €458.23
D. €507.96