ABC (HK) Ltd. (STOCK VALUATION)

Now is the end of 2007. ABC (HK) Ltd. is a telecoms firm traded on the Stock Exchange of Hong Kong. Your broker called again advising you to buy the stock. The stock is currently trading at $8.79, down from $10.8 a year ago. The price had been $15 two years ago but arbitrageurs considered it overvalued and sold it short. This resulted in a significant price decline. You are asked to:

Estimate the companys cost of equity, cost of debt, and weighted average cost of capital (WACC).

Estimate the companys stock price. The firm has just paid a dividend of $2.03 and dividends are forecasted to grow at a modest 2% per year. Should you buy the stock?

The corporate tax rate is 16%. The firms debt/equity ratio is 42.86%. The yield on Hong Kongs one-year Exchange Fund Notes is 2.3%.

You have identified China Mobile, China Unicom, Hutchison Telecom, Hycomm Wireless, PCCW, and Smartone Telecom as the major competitors. Their current are summarized in the table below.

BETAS () OF MAJOR TELECOM FIRMS LISTED ON THE SEHK

	2007
China Mobile	0.85
China Unicom	1.15
Hutchison Telecom	1.25
Hycomm Wireless	1.59
PCCW	1.55
Smartone Telecom	1.18

ABC (HK) LTD has four outstanding bonds with the following yields:

ABC (UK) LTD BOND YIELDS

	Face Value ($ million) AAA	Yield to maturity AA
Bond 1	600	3.22%
Bond 2	500	3.81%
Bond 3	300	4.95%
Bond 4	400	5.25%

Finally, the annual returns of the Hang Seng Index in the Hong Kong stock market for the past 27 years are summarized in the table below:

ANNUAL RETURNS OF THE HANG SENG STOCK INDEX

	Annual Returns
1981	-26.12%
1982	-31.72%
1983	-8.82%
1984	48.35%
1985	56.28%
1986	36.35%
1987	104.68%
1988	-39.85%
1989	14.33%
1990	4.39%
1991	54.63%
1992	41.40%
1993	44.34%
1994	30.83%
1995	3.78%
1996	27.04%
1997	32.54%
1998	-49.59%
1999	63.90%
2000	23.60%
2001	-34.00%
2002	-4.07%
2003	32.43%
2004	20.35%
2005	22.69%
2006	29.98%
2007	63.64%