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Analyst Debra Williams must decide whether to invest in one of two stocks (A and B). Both A and B are trading at $100 per share.
Her forecasts for company A as of the beginning of 2016 are the following:
Assume: Terminal growth in perpetuity 3.5%; cost of capital 9%; 10 million shares outstanding.
Forecast ($ millions)
2016
2017
Terminal Value
Net Income
100
108
113
Dividend
10
11
13
Beginning Book Value of Equity
900
Residual NI
Discount Factors:
1
2
3
Present Value of $1 at 9%
0.917
0.842
0.772
(a) Based on the assumptions above, what is the intrinsic value of A's stock at the beginning of 2016?
Williams estimates that company B has reached its steady state. Beginning book value of equity is 100 per share; current ROE is 9%; cost of capital 9%; and perpetual growth expected to be 3.5%.
(b) Based on the assumptions above, what is the intrinsic value of B's stock?
(c) Which stock should Williams buy? Why?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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