Economics 720
Spring 2010
MSFA Program
John Gonzales
Assignment #2
1.
This problem involves valuing a stock with the twostage growth model and the
trailing P/E.
The following information is given.
Find the price of the stock.
• initial (recent) D
1.40
• projected growth for 4 yrs
14.00%
• estimated r
10.00%
• estimated trailing P/E
12
• estimated D/E
40%
2.
This problem involves valuing a stock with the Hmodel.
The following information
is given.
• initial g
S
=18%
• g
S
decreases linearly to g
L
=10% over the first 20 years
• g
L
=10%
• D
0
= $1.50
• r
S
=14%
(a)
Calculate the value of the stock.
(b)
Suppose the initial fast growth period was for only 14 years.
Calculate the
value of the stock.
(c)
Refer back to the initial data.
Suppose the initial fast growth is only 16%.
Calculate the value of the stock.
3. A firm’s most recent dividend was $2.00.
The firm is expected to grow at 18% for
the first 4 years, grow according to the Hmodel for the next 8 years, and then grow
forever at 10%.
The required rate of return on equity (i.e. the discount rate) is 14%.
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 Spring '10
 Tsuash
 Economics, Dividend yield, P/E ratio, dividend payout ratio, initial fast growth

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