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

Fiscal year, A time of 12 consecutive months used by an organization to acc...

A time of 12 consecutive months used by an organization to account for and report the results of its operations.

Ledger, Need to get my Balance Sheet solved

Need to get my Balance Sheet solved

Audit Reports, Why it is important for independent auditor to be a member o...

Why it is important for independent auditor to be a member of a professional body?

Procedure of recording business transactions, Q. Procedure of recording bus...

Q. Procedure of recording business transactions? The raw information of accounting is the business transactions. We documented the transactions in section 1 as increases or dec

Accounts receivable departments, What are the components or materials used ...

What are the components or materials used by Accounts receivable departments? Ans) Accounts Receivable department is very vital department of the company. The responsibilities o

Balance sheet concepts, THE BALANCE SHEET CONCEPTS According to Howard,...

THE BALANCE SHEET CONCEPTS According to Howard, a Balance Sheet might be definite as - 'a statement which reports the principles owned by the enterprise and the assert of the c

Company''s present stock prices, How do your calculated stock prices compar...

How do your calculated stock prices compare to the company's present stock prices?   What do you think is causing them to deviate? This will need you to investigate a lit

Show accumulated depreciation account with example, Q. Show Accumulated dep...

Q. Show Accumulated depreciation account with example? Micro Train credits the depreciation amount to an accumulated depreciation account which is a contra asset rather than di

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