Question
A company selling luxury goods has a book value per share of $220 at the beginning of the year (i.e., at the start of year
A company selling luxury goods has a book value per share of $220 at the beginning of the year (i.e., at the start of year 1). This company is expected to announce end-of-year results that show earnings per share (EPS) reaching $30.0 (in year 1). The growth rate of the book value is 10% in year 1, but the company is expecting a slowdown in growth given the high likelihood of a recession in the coming years. The growth rate of the book value is thus expected to be 5% in years 2 and 3. After that, the company expects to recover a bit: the growth rate of its book value is expected to be 6% from year 4 onwards. EPS are expected to drop by 50% in years 2 and 3, thus dropping to $15. From year 4 onwards, the EPS are expected to be stable at $20. Assume a constant discount rate of 12%. What should be the company's share price today?
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