What is the equilibrium price of the stock

Assignment Help Finance Basics
Reference no: EM132407057

Suppose that the consensus forecast of security analysts of NoWork Inc. is that earningsnext year will be E1 = $5.00 per share. The company tends to plow back 60% of its earnings and pay the rest as dividends. The CFO estimates that the company's growth rate will be 8% from now on.

(a) If your estimate of the company's required rate of return is 12%, what is the equilibrium price of the stock?

(b) Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock's required rate of return or (ii) the CFO's estimate of the company's future growth rate?

(c) Suppose there is uncertainty about the growth rate. With 50% probability the growth rate will be 6%, with 50% probability the growth rate will be 10%. What are the respective market values under the two growth rates? What must be the price of the stock, given that both growth rates have equal probability?

(d) Under the probabilities in (c) the expected growth rate of the firm is 8%. How come the valuation in part (c) is different from the valuation in part (a)?

Reference no: EM132407057

Questions Cloud

Zoo Monitoring System : As a zookeeper, it is important to know the activities of the animals in your care and to monitor their living habitats
Denial-of-service attacks are common method : Denial-of-service attacks are a common method to bring down an organization's Web server/site.
What is the estimated value of this office property : a. What is the estimated value of this office property (assume a .10 terminal cap rate)? b. What is the current, or "going-in," cap rate for this property?
Calculate the price of a us-dollar-denominated euro : Calculate the price of a US-dollar-denominated Euro put maturing in 6 months with a strike of $1.1.
What is the equilibrium price of the stock : (a) If your estimate of the company's required rate of return is 12%, what is the equilibrium price of the stock?
Interested in an investment where the initial investment : If you are interested in an investment where the initial investment is $129,000 and your required cost of capital is 12%.
How would this affect his decision to get an mba : The current borrowing rate is 5.4 percent. How would this affect his decision to get an MBA?
Remaining non-systematic risk : At least theoretically the "fully diversified portfolio" would have no remaining non-systematic risk (or, at least, it would be holding only systematic risk),
Define the financial planning process : Identify and discuss the three most important personal factors and the three most important economic factors that affect your financial planning decisions.

Reviews

Write a Review

Finance Basics Questions & Answers

  How much in dividends were paid to shareholders

In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends were paid to shareholders during the year? Assume..

  Understanding the variation of bond values and yields

Understanding the variation of bond values and yields Accrued Interest. You purchase a bond with an invoice price of $1,035.

  Will morgan accept the project

Morgan uses net present value method and has a discount rate of 12%. Will Morgan accept the project? What's the NPV?

  Roles of international financial institutions

Would you please define the roles of international financial institutions (e.g. IMF, World Bank, ADB, etc.) and describe how they are employed in global financing operations

  Analytical tool for protecting net worth

Duration gap management is a powerful analytical tool for protecting net worth of a financial institution from damage due to shifting interest rates.

  Return on total assets

Barnes Corp's total assets at the end of last year were $415,000,000 and its net income after taxes was $17,750,000. What was its return on total assets?

  Xytex products just paid a dividend of 235 per share and

xytex products just paid a dividend of 2.35 per share and the stock currently sells for 59. if the discount rate is 14

  What type of industries would make most use of short-range

What type of industries would make the most use of short-range, medium-range, and long-range forecasts?

  What is a branded community

What is a branded community? If you are a member or one or more branded communities

  Income annuity versus these other financial instruments

What are the pros and cons of using the life income annuity versus these other financial instruments?

  How are project classifications used in capital budgeting

How are project classifications used in the capital budgeting process?

  Stock investing risk-required rate of return-interest rates

Explain why a foreign investment project might have a lower required return than an otherwise-identical domestic project. What is the relationship between interest rates and bond prices?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd