Reference no: EM132537262

You will find this task much easier if they are expected to have positive earnings growth in the next few years as well. Yahoo reports a positive PE (TTM), which divides the current stock price by the Twelve Month Trailing earnings.

For your selected company, compose a answer that provides the following information.

Question 1: Very briefly, describe the company. What are their central and ongoing operations (the ones that result in revenue)? Be sure to give their name and ticker symbol.

Question 2: Calculate the difference between the constant growth rate g and discount rate r that gives you Yahoo's value of PE(TTM)? This is easy: if PE = 1/(r-g), then r-g = 1/PE.

Question 3: Describe the range of r you think is reasonable. Most analysts use discount rates between 8% and 15% for common stock.

Question 4: Choose higher values if the firm is in a risky industry and/or has a lot of debt.

Question 5: Use your estimate of r to estimate short-term growth g and a persistence factor p in the modified Gordon Growth Model. In this model, earnings grows at rate g in year 1, g*p in year 2, g*p2 in year 3, and so on. So you can get the same number with a high g and low p that you get with a low g and high p. What values make sense and why?

Question 6: If the PE ratio does not not seem reasonable, offer a suggestion as to why. For example, investors may be betting on some big event that will create major growth or a major loss (e.g., a change in regulation, a lawsuit, a patent approval, an acquisition). They may also be paying a lot of attention to the net book value.

Question 7: In addition to writing your own post, you are encouraged to comment on one or two posts by others. What do you think of their assumptions and conjectures? Do you have any alternatives to suggest?