el fund, is considering adding Tal. .folio. Talisman is an independ- B. 4.25%. C 5.30%. The following information relates to Questions 22-27 Assorted Fund, a UK-based globally diversified equity mutual fund, is isman Energy Inc. (Toronto Stock Exchange: ILM) to its portfolio. Talis ent upstream oil and gas company headquartered in Calgary, Can oil and gas companies in Canada and has operations in several countries analyst at the mutual fund, has been assigned the task of estimatin rtered in Calgary, Canada. It is one of the of the largest countries. Brian Dobson, an urpose. After carefully rs. he believes the company growth thereafter. So, he has vidends during 2006, 2007, and 2008 signed the task of estimating a fair value of Talis Dobson is aware of several approaches that could be used for this purpose. Af considering the characteristics of the company and its competitors, he believes will have extraordinary growth for the next few years and normal growth there concluded that a two-stage DDM is the most appropriate for valuing the stock Talisman pays semi-annual dividends. The total dividends during 2006, 2007 have been C30.114. C$0.15, and C$0.175, respectively. These imply a growth rate of 2). cent in 2007 and 17 percent in 2008. Dobson believes that the growth rate will be 14 perce in the next year. He has estimated that the first stage will include the next eight years. Dobson is using the CAPM to estimate the required return on equity for Talisman. He has estimated that the beta of Talisman, as measured against the S&P/TSX Composite Index (formerly TSE 300 Composite Index), is 0.84. The Canadian risk-free rate, as measured by the annual yield on the 10-year government bond, is 4.1 percent. The equity risk premium for the Canadian market is estimated at 5.5 percent. Based on these data, Dobson has estimated that the required return on Talisman stock is 0.041 +0.84(0.055) = 0.0872 or 8.72 percent. Dobson is doing the analysis in January 2009, and the stock price at that time is C$17. Dobson realizes that even within the two-stage DDM, there could be some variations in the approach. He would like to explore how these variations affect the valuation of the stock Specifically, he wants to estimate the value of the stock for each of the following approaches separately. ge of eight years. The 1. The dividend growth rate will be 14 percent throughout the first stage of eighty dividend growth rate thereafter will be 7 percent. II. Instead of using the estimated stable growth rate of 7 percent in the second stay wants to use his estimate that eight years later Talisman's stock will be won carnings per share (trailing P/E of 17). He expects that the earnings rete time will be 0.70. III. In contrast to the first approach above in which the growth rate percent in the eighth year to 7 percent in the ninth, the growth rate w from 14 percent in the first year to 7 percent in the ninth. second stage, Dobson I be worth 17 times its ne earnings retention ratio at that urate declines abruptly from 14 vth rate would decline linearly 24. 22. What is the terminal value of the stock based on the first approach? A. C$17.65. B. C$31.06. C. C$33.09. In the first approach, what proportion of the total value of the stock is represented by the value of second stage? A. 0.10. B. 0.52. C. 0.90. What is the terminal value of the stock based on the second approach (earnings multiple)? A. C$12.12. B. C$28.29. C. C$33.09. What is the current value of the stock based on the second approach?! A. C$16.24. B. C$17.65. C. C$28.29. Based on the third approach (the H-model), the stock is: A. undervalued. B. fairly valued. C. overvalued. w w w.haba mancanusana wuld be if he domain of the first stage