What is the present value of this firm equity

Assignment Help Financial Management

Reference no: EM131920771

You want to value a firm which is growing fairly fast now (abnormal growth) but will begin reaching maturity and a correspondingly lower earnings growth rate shortly. You’ve decided that a three-stage dividend discount model fits your needs perfectly for this firm. Using the information below, calculate the present value of this firm.

Earnings last year (E0) = $2.95 per share Dividends last year (D0) = $0.60

ROE last year = 25% growth = retention rate x ROE

You expect earnings growth, dividend payout and ROE to be stable over the next two years. At that time we will see the firm slow its earnings growth, increase its dividend payout, and reduce its cost of equity over the next three years.

The long-term Treasury rate is 4%, the firm’s current beta is 1.4, but you expect the long-term beta to fall to 1.0 by the end of your phase down period and the market risk premium is 6%.

Long-term earnings are expected to grow at three percent to perpetuity and firm should be able to maintain a constant ROE of 10% for perpetuity.

What is the present value of this firm’s equity using the three-stage dividend discount model?

Reference no: EM131920771

Questions Cloud

Think about what is appropriate discount rate : Your boss is considering an investment in new manufacturing equipment. What is the NPV of the proposed project (Think about what is appropriate discount rate)?

What is the new weighted average cost of capital : Assume that the cost of equity and the cost of debt stay the same. What is the new weighted average cost of capital?

Differences between the two firms and the industry : Compare and analyze differences between the two firms and the industry.

Someone prefer to work for high-debt or low-debt firm : According to the stakeholder theory of capital structure, would someone prefer to work for a high-debt or a low-debt firm? Explain why.

What is the present value of this firm equity : What is the present value of this firm’s equity using the three-stage dividend discount model?

Power plant that produces emissions of sulfur dioxide : A power plant that produces emissions of sulfur dioxide (SO2). Should the power plant install the scrubber and commit to using it?

Bull spread with calls : Draw a graph showing the payoff and profit for a bull spread using these options.

Calculate the interest coverage ratio for this firm : A firm issues a single level coupon bond with a face value of $1,000 and a coupon rate of 15%. Calculate the interest coverage ratio for this firm.

Calculate the risk decomposition of portfolio manually : Calculate the risk decomposition of this portfolio manually. What is the top risk contributor? Does it have the maximum weight.

User Account

All Pages