As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a “hold” recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent. Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125 and final answer to O decimal places, e.g. 145.)
As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a “hold” recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent. Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125 and final answer to O decimal places, e.g. 145.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a
"hold" recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive
analysis of the industry and you feel that the probability the firm will capture a substantial share of the new
market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a
rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the
unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the
firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the
earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the
firm and its earnings growth rate will remain at 12 percent.
Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125
and final answer to O decimal places, e.g. 145.)
Expected price
$
150](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcdd064f1-8a94-45a7-b62f-83afeef9ca2a%2F8be49a12-b41b-441d-84f2-96fd01112d3b%2Fktlynlh_processed.jpeg&w=3840&q=75)
Transcribed Image Text:As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a
"hold" recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive
analysis of the industry and you feel that the probability the firm will capture a substantial share of the new
market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a
rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the
unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the
firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the
earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the
firm and its earnings growth rate will remain at 12 percent.
Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125
and final answer to O decimal places, e.g. 145.)
Expected price
$
150
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