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

The tds deduction & service charges for fy 2011- 2012 is?, It is reduction ...

It is reduction of taxes where from the income is produces and regarding services to be taxed there are about 120 services which are taxed in India for provision of service tax

Accounting Information Systems, ABC Insurance Company offers individual aut...

ABC Insurance Company offers individual auto and home insurance servicing the East Coast. The company''s home office is located in Albany, New York. However, ABC Insurance Company

How the payment mechanism work. explain, The open items of an account can o...

The open items of an account can only be cleared once you post an identical offsetting amount to the account. In other words, the balance of the items assigned to every other must

Determine how the disallowance of lifo, determine how the disallowance of L...

determine how the disallowance of LIFO will impact U.S. multinational firms that report under IFRS

Accounts show the amount of money owed to the firm, __________ accounts sho...

__________ accounts show the amount of money owed to the firm by customers. A. Supply B. Prepaid C. Receivables D. Payables

Explain merchandising companies, Q. Explain Merchandising companies? Me...

Q. Explain Merchandising companies? Merchandising companies buy goods that are ready for sale and then sell them to customers. Merchandising companies comprise clothing stores,

Explain the dual aspect concept and materiality concept, Illustrate the sub...

Illustrate the subsequent Accounting Concepts: a) Dual Aspect concept b) Materiality concept c) Matching concept d) Conservatism concept

Prepare a balance sheet, The balance sheet account as of July 31, 1995 for ...

The balance sheet account as of July 31, 1995 for XYZ company are : Capital: (fix lib)                            35,630 Office Equipment (ass)                  16730 Delivery

What do you understand by goodwill, Q. What do you understand by Goodwill? ...

Q. What do you understand by Goodwill? Goodwill -- in accounting, difference between what a company pay when it buys theassets of another company and book value of those assets

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