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Assignment 2

# Assignment 2 - Economics 720 MSFA Program Spring 2010 John...

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Economics 720 Spring 2010 MSFA Program John Gonzales Assignment #2 1. This problem involves valuing a stock with the two-stage 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 H-model. 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 H-model 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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