32. Residual Income Model and Nonconstant Growth (LO3, CFA9) When a stock is going through a period...

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32. Residual Income Model and Nonconstant Growth (LO3, CFA9) 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:

P 0  =  Σ

t = 1 T

EP S t  +  B t−1  −  B t ________

(1 + k) t

 + 

P T ____ _

(1 + k) T where:

P T  =  B T  + 

EP S T (1 + g)  −  B T  × k _______ ____ k − g Al’s Infrared Sandwich Company had a book value of $12.95 at the beginning of the year, and the earnings per share for the past year was $3.41. Molly Miller, a research analyst at Miller, Moore &

Associates, estimates that the book value and earnings per share will grow at 12.5 and 11 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 8.2 percent. What is the value per share for Al’s Infrared Sandwich Company?

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Fundamentals Of Investments Valuation And Management

ISBN: 9781260013979

9th Edition

Authors: Bradford Jordan, Thomas Miller, Steve Dolvin

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