Question
1. The earnings of Accurate Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow
1. The earnings of Accurate Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Accurate currently pays a dividend of $0.36 per share. What is the value of Accurate stock to an investor who requires a 16% rate of return? If stock has a market price of $15 do you buy? Show all work and discuss.
A. Calculate the dividend/cash flow each year using the growth rate
B. Determine where the growth of the company becomes constant (this is the key constant growth rate model), this is called the terminal or horizon value.
C. Place each of these cash flows (or dividends) into the calculator or excel using the interest rate given and calculate NPV which is called the intrinsic value.
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