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Question

Assume that XYZ Company generated cash flows of $2.00 per share last year. XYZ's cost of capital is 12%. Estimate

the value per share of XYZ for each of the following sets of assumptions.

1.No future growth is expected.

2.Constant future growth of 6% is expected.

3.Growth of 10% per year is expected for the next three years, followed by constant growth of 6%.

4.Growth is expected to decline from 10% to 6% over the next four years, and then continue at 6%.

5.Growth of 10% per year is expected for the next two years, declining to 6% over the next four years, and then continuing at 6%.

6.Growth is expected to be 12% in year one, 11% in year two, 10% in year three, then decline to 6% over the next four years, and then continue at 6%.

Top Answer

1.No future growth is expected. The price per share = cash flow next year/(Cost of capital - growth rate) = 2 / (0.12-0) =... View the full answer

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