2. You are an equity analyst examining a firm that is currently trading at $40/share. The consensus market estimates for EPS (Earnings Per Share) for the next three years are $2 next year and $3 the year after and $4 the year after that (year 3). You believe these EPS estimates are accurate. Other similar firms trade at a P/E multiple of 12.5 with an expected average long term growth rate estimate starting today of 4%. Assume all earnings are paid out in dividends. a. If you believe your stock reaches steady state and will grow from then like other similar firms today, would you recommend buying the shares at the current stock price? b. After the first year once the dividend is paid, the stock price increases to $55 as it becomes known to everyone that the long term growth rate will actually be 1% more (5%). Ignoring tax issues, would you recommend buy, hold or sell of the stock at that time?
2. You are an equity analyst examining a firm that is currently trading at $40/share. The consensus market estimates for EPS (Earnings Per Share) for the next three years are $2 next year and $3 the year after and $4 the year after that (year 3). You believe these EPS estimates are accurate. Other similar firms trade at a P/E multiple of 12.5 with an expected average long term growth rate estimate starting today of 4%. Assume all earnings are paid out in dividends.
a. If you believe your stock reaches steady state and will grow from then like other similar firms today, would you recommend buying the shares at the current stock price?
b. After the first year once the dividend is paid, the stock price increases to $55 as it becomes known to everyone that the long term growth rate will actually be 1% more (5%). Ignoring tax issues, would you recommend buy, hold or sell of the stock at that time?
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