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Unformatted text preview: IU Purdue E(EPS1)1 $5 $5 Discount Rate 12.5% 12.5% 1 EPS=earningspershare 44 Equity: Stock Prices and Risk Consider two firms: You expect IUs and Purdues EPS to grow at the same rate. IU Purdue E(EPS1)1 $5 $5 Discount Rate 20.0% 12.5% 1 EPS=earningspershare 55 Equity: Valuation via PriceRatios So when choosing the appropriate P/Eratio, make sure its from a company/industry with similar growth opportunities and similar discount rate (i.e., similar level of risk)! 66 Equity: Valuation Note that your estimates are highly sensitive to changes in your inputs! e.g., constant dividenddiscountmodel with E(D1)=$1 discount rate growth rate 8% 9% 10% 11% 12% 5% $ 33.33 $ 25.00 $ 20.00 $ 16.67 $ 14.29 6% $ 50.00 $ 33.33 $ 25.00 $ 20.00 $ 16.67 7% $ 100.00 $ 50.00 $ 33.33 $ 25.00 $ 20.00 77...
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This note was uploaded on 04/09/2011 for the course MGMT 411 taught by Professor Clarke during the Winter '09 term at Purdue UniversityWest Lafayette.
 Winter '09
 Clarke

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