What is the intrinsic value of b stock

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Reference no: EM133062570

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?

Reference no: EM133062570

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