Two-stage ddm model, Accounting Basics

Assignment Help:

Assorted fund, a U.K.-based globally diversified equity mutual fund, is considering adding Talisman Energy Inc. (Toronto Stock Exchange: TLM) to its portfolio. Talisman is an independent upstream oil and gas company headquartered in Calgary, Canada. Brian Dobson, an analyst at the mutual fund, has been assigned the task of estimating a fair value of Talisman. Dobson is aware of several approaches that could be used for this purpose.
Talisman pays semi-annual dividends. The total dividends during 2006, 2007, and 2008 have been C$0.114, C$0.15 and C$0.175, respectively.  These imply a growth rate of 32 percent in 2007 and 17 percent in 2008. Dobson is doing the analysis in January 2008 and the stock price at that time is C$17. He has estimated that the required rate of return on Talisman stock is 8.72 percent.
Dobson believes that the growth rate will be 14 percent throughout the first stage of eight years. The dividend growth rate will be 7 percent thereafter.

Instead of using the estimated stable growth rate of 7 percent in the second stage, Dobson wants to use his estimate that eight years later Talisman's stock will be worth 17 times its earnings per share (trailing P/E of 17). He expects that the earnings retention ratio at that time will be 0.70.

a.    What is the terminal value of stock based on the two-stage DDM model?
b.    What proportion of the total value of the stock is represented by the value of the second stage?
c.    What is terminal value of the stock based on the earnings multiple approach?
d.    What is the current value of the stock based on the second approach?
e.    Dobson is wondering what the consequences to stock price would be if the duration of the first stage was assumed to be 11 years instead of 8 years. Comment.


Related Discussions:- Two-stage ddm model

What is the auto invoice?, A great tool to import and certify transaction d...

A great tool to import and certify transaction data from other financial systems and make invoices debit memos credit memos and on-account credits Setup steps: 1. Describe th

Prepaid expenses and deferred charges, Q. Prepaid expenses and deferred cha...

Q. Prepaid expenses and deferred charges? Prepaid expenses, deferred charges -- assets already paid for, which are being used up or willexpire. Insurance paid for in advance is

Different depreciation methods, Different Methods Of depreciation Dimini...

Different Methods Of depreciation Diminishing Value Method Straight Line Method Annuity Method Depletion Method Written Down value Method

An invoice for product x totals $1, An invoice for product X totals $1,200 ...

An invoice for product X totals $1,200 and is dated July 6, 2000 with terms 2/10-60X. If the invoice is paid on September 3, 2000, what is the net amount of payment? A. $912

What is the meaning of fica tax, FICA Tax (Social Security) Both the...

FICA Tax (Social Security) Both the employee and the employer contribute equally. OASDI has a Taxable Wage Base that is the maximum amount of earnings during a calendar y

Describe the functions and limitations of accounting, 1. Describe the follo...

1. Describe the following with detailed example: i. Wealth Maximization ii. Profit maximization 2. Describe the functions and limitations of accounting. 3. Prepare a deta

How can price inflation effect a university negatively, How can price infla...

How can price inflation effect a university negatively in the future? Like, what are a few things in the university that will be impacted?

CANADA PENSION PLAN REPORTING REQUIREMENTS ON THE T4, SCENARIO In May of t...

SCENARIO In May of the current year, your employer received a PIER report from the CRA that identified Canada Pension Plan (CPP) contribution deficiencies for employees in the org

Responsibility in oracle applications, Users cannot access the simultaneous...

Users cannot access the simultaneous programs ( just like Forms) until unless the program is attached to a responsibility by a ?Request Group?. Therefore the responsibilities give

Write Your Message!

Captcha
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