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Unformatted text preview: though, this smoothing effect cannot have a large effect on the value estimate obtained from the model. E. The model requires that, in the long term, the growth rate for a firm is stable (close to the growth rate in the economy). Thus, cyclical firms, which maintain an average growth rate close to a stable rate, cyclical ups and downs notwithstanding, can be valued using this model. Question 3 A. Value Per Share = $3.56 * 1.055/(.1120  .055) = $65.89 B. $3.56 (1 + g)/(.1120  g) = $80 Solving for g, g = (80 * .112  3.56)/(80 + 3.56) = 6.46% Question 4: D 5 = 1.25x 60% = $0.75; g=40%x15%=6%; r=12%; I=$6million; million I r g r D V 94 . 1 $ ) 1 ( 4 5 = − + − = Since the value of the firm as a going concern is less than its salvage value of $3million, the family should shut down the business . Question 5: 08 . 5 $ ) 1 ( ) ( ) 1 ( 4 5 4 4 = + − + + = r g r D r D P...
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 Spring '09
 LUXIAOLEI
 Net Present Value, Stock Valuation, Valuation, Gordon Growth Model, Equity Valuation Solutions

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