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2. Nathalie is valuing the stock of a food-processing business. She feels confident explicitly projecting earnings and dividends to three years (to t = 3).

2. Nathalie is valuing the stock of a food-processing business. She feels confident explicitly projecting earnings and dividends to three years (to t = 3). Other information and estimates are as follows:

  • Required rate of return = 0.09
  • Average dividend payout rate for mature companies in the market = 0.45
  • Industry average ROE = 0.10
  • E3 = $3.00
  • Industry average P/E = 12

On the basis of this information, answer the following questions:

A. Compute terminal value (V3) based on comparable. B. Contrast your answer in Part A to an estimate of terminal value based on the Gordon growth model.

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