2. Based on the Residual Income Model, what recommendation would Mechanic issue for the stock of DRL. State 1 ideal condition for each of the 3 predominant future cash flow definitions in stock valuation models
2. Based on the Residual Income Model, what recommendation would Mechanic issue for the stock of DRL. State 1 ideal condition for each of the 3 predominant future cash flow definitions in stock valuation models
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
1. Aaron Mechanic, CFA is responsible for valuing the shares of Duotronics Research Laboratories (DRL). The stock is currently trading at $8.75 and he gathers the following financial information about the company:
- Expect ROE 16% annually for each of the next 4 years
- Current BV of equity $435,000,000
- Shares outstanding 60 million
- Required
return on equity 12% - No dividends paid
- All earnings are reinvested
- EPS is equal to the beginning book value time ROE
- Continuing residual income = will remain constant at the 4 year
forecast level for the foresee-able future
2. Based on the Residual Income Model, what recommendation would Mechanic issue for the stock of DRL. State 1 ideal condition for each of the 3 predominant future cash flow definitions in stock valuation models
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