When a stock is going through a period of nonconstant growth for T periods, followed by constant growth forever, the residual incomemodel can be modified as follows:Po = -1ΣΤEPS,+B-B(1+k)'+Pr(1+k)where:Pr=BT+EPS (1+g)-Brxkk-9Al's Infrared Sandwich Company had a book value of $21.00 at the beginning of the year, and the earnings per share for the past yearwas $9.41. Molly Miller, a research analyst at Miller, Moore & Associates, estimates that the book value and earnings per share willgrow at 21.50 and 20.00 percent per year for the next four years, respectively. After four years, the growth rate is expected to be 6percent. Molly believes the required return for the company is 11.80 percent. What is the value per share for Al's Infrared SandwichCompany?Note: Do not round intermediate calculations. Round your answer to 2 decimal places.Value per share

Step 1: Understand the Given DataBook Value at Beginning of Year (B₀): $21.00Earnings Per Share for…

Answered: When a stock is going through a period…

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

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When a stock is going through a period of nonconstant growth for T periods, followed by constant growth forever, the residual income model can be modified as follows: Ро where: EPS,+B₁-1-B₁ (1+k)' + Рт (1+k)T PT = BT + EPST (1+g)-BTXk k-g Al's Infrared Sandwich Company had a book value of $16.95 at the beginning of the year, and the earnings per share for the past year was $10.65. Molly Miller, a research analyst at Miller, Moore & Associates, estimates that the book value and earnings per share will grow at 22.50 and 21.00 percent per year for the next four years, respectively. After four years, the growth rate is expected to be 6 percent. Molly believes the required return for the company is 12.20 percent. What is the value per share for Al's Infrared Sandwich Company? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Value per share $ 3,107.92
Historical nominal returns for Company A have been 8% and -20%. The nominal returns for the market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Company A. Please include equations used. Thanks
A firm's target dividend is $4.40 and the prior-period dividend is $2.75. What is the change in dividends if the adjustment coefficient (B) is equal to 1? O $-3.30 O $3.30 00 O $1.65
(Computing rates of return) From the following price data, compute the annual rates of return for Asman and Salinas. Time 1 2 3 12 4 14 (Click on the icon in order to copy its contents into a spreadsheet.) How would you interpret the meaning of the annual rates of return? Asman $9 11 Salinas $30 27 32 36 The rate of return you would have earned on Asman stock from time 1 to time 2 is %. (Round to two decimal places.)
BioScience Inc. will pay a common stock dividend of $4.45 at the end of the year (D₁). The required return on common stock (x) is 16 percent. The firm has a constant growth rate (g) of 8 percent. Compute the current price of the stock (Po). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current price Prev 9 of 10 MacBook Air Next >
Investors require an 8% rate of return on Mather Company's stock (l.e., rs = 8%). a. What is its value if the previous dividend was Do = $3.00 and Investors expect dividends to grow at a constant annual rate of (1) -6%, (2) 0%, (3) 3 %, or (4) 5%? Do not round intermediate calculations. Round your answers to the nearest cent. (1) $ (2) $ (3) $ (4) $ 20.14 37.50 61.80 b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Round your answers to the nearest cent. If the value is undefined, enter N/A. (1) $ (2) $
Boehm Incorporated is expected to pay a $2.70 per share dividend at the end of this year (i.e., D1 = $2.70). The dividend is expected to grow at a constant rate of 8% a year. The required rate of return on the stock, rs, is 16%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.
GHI's last dividend was P2.00. The dividend growth rate is expected to be constant at 3% for 2 years, after which dividends are to expected to grow at a rate of 8% forever. The company's required rate of return is 12%. What is the company's current stock price? A. P57.30 B. P51.40 C. P53.80 D. P49.20 E. Answer not given
Huang Company's last dividend was $2.45. The dividend growth rate is expected to be constant at 22.5% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 10%, what is its current stock price? Do not round intermediate calculations. a. $108.70 b. $90.67 c. $98.82 d. $101.27 e. $102.08
Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the band - yield - plus - nisk - premium approach, and the DCF model. Burton expects next year's annual dividend, D₁, to be $1.70 and it expects dividends to grow at a constant rate g = 5,4% The firm's current common stock price, Po, is $20.00. The current risk-free rate, FRF, = 4.9% the market risk premium, RPM = 6.3%, and the firm's stuck has a current beta, b, = 1.40. Assume that the firm's cast of debt, rd is 10.78%. The firm uses a 3.3% risk premium when arriving at a ballpark estimate of its cost of equity using the bund-vield-risk-premium approach. What is the firm's cost of equity using each of these three approaches? CAPM cost of equity. Band yield plus visle premium: DCF cost of equity: % 1. %
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Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 4.9%. The firm's current common stock price, P0, is $25.00. If it needs to issue new common stock, the firm will encounter a 4.5% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places. _____% What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places. _____%

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