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

Illustrate a simple accounting system, Q. Illustrate a simple accounting sy...

Q. Illustrate a simple accounting system? James Stevens was captivating an accounting course at State University. as well he was helping companies find accounting systems that

Classify the following items as, Classify the following items as (a) defer...

Classify the following items as (a) deferred expense (prepaid expense), (b) deferred revenue (unearned revenue), (c) accrued expense (accrued liability), or (d) accrued reven

What is depreciation, Q. What is Depreciation? Depreciation -- an expen...

Q. What is Depreciation? Depreciation -- an expense which is supposed to reflect the loss in value of a fixed asset. Forinstance if a machine will entirely wear out after ten y

Requirements for accounting standards, The information contained in publish...

The information contained in published financial statements is of specific importance to external users, as shareholders and investors. Without any information they would not be ca

Gearing, Remedies of overtrading

Remedies of overtrading

Specific identification method of inventory, Q. Specific identification met...

Q. Specific identification method of inventory? Specific identification- The specific identification method of inventory costing put together the actual cost to an identifiable

Accounting equation, Definite the meaning of accounting equation

Definite the meaning of accounting equation

Importance of proper inventory valuation, Q. Importance of proper inventory...

Q. Importance of proper inventory valuation? A merchandising company is able to prepare accurate statements of retained earnings, income statements and balance sheets only if i

Explain about period costs, Q. Explain about Period costs? Period costs...

Q. Explain about Period costs? Period costs are costs not noticeable to specific products and expensed in the period incurred. Administrative and Selling costs are period costs

What is managerial accounting information, Q. What is Managerial accounting...

Q. What is Managerial accounting information? A Managerial accounting information is for internal use and provides special information for the managers of a company. The inform

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