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

Samuel, what is the implication of applying accounting concept wrongly

what is the implication of applying accounting concept wrongly

Journal.., i want to clear concepts of journal

i want to clear concepts of journal

The accounting records of nu-tonics inc., The accounting records of Nu-toni...

The accounting records of Nu-tonics Inc., include the following information for the year ended December 31, 2013:  Materials Inventory as at 1 January 2013 $ 20,000  Materials

Prepare a narrative describing the transaction cycle process, Assignment: ...

Assignment: This assignment will be to describe and document the internal controls over a transaction cycle at a local business. A transaction cycle could be the sales process,

What do you mean by unearned revenue, Q. What do you mean by unearned reven...

Q. What do you mean by unearned revenue? A liability/revenue adjustment concerning unearned revenues covers situations in which a customer has transferred assets typically cash

Acct, Gwinnett Park Co. reported net income of $506,600 for its fiscal year...

Gwinnett Park Co. reported net income of $506,600 for its fiscal year ended September 30, 2014 . At the beginning of that year, 150,000 shares of common stock were outstanding. On

Maplehurst company, Q. Maplehurst Company? Maplehurst Company manufactu...

Q. Maplehurst Company? Maplehurst Company manufactures huge spinning machines for the textile industry. The company had purchased USD 100000 of small hand tools to utilize in i

Heww inc., Heww Inc., issued a $50,000, 10 year bond with a stated interes...

Heww Inc., issued a $50,000, 10 year bond with a stated interest rate of 6%. Assume interest payments are made semi-annually. What is the selling price of the bond if the mark

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