Question
Given the following information, answer the question step by step. Tom works in XYZ company. Tom, a portfolio manager, is evaluating common stock value of
Given the following information, answer the question step by step.
Tom works in XYZ company.
Tom, a portfolio manager, is evaluating common stock value of ABC Company. He decides to use Constant Perpetual Growth Model for the evaluation and obtains the following information related to ABC Company and market: ABC Company Latest dividend per share paid: $1.5 Earnings per share: $2.0 Book value per share: $12.5 Asset beta: 1.2 Debt-to-equity ratio: 60% Tax rate: 25% Existing share price of common stock: $20
Market
Risk-free rate: 2% Market risk premium: 8%
(a) Compute the following figures: i. Sustainable growth rate. ii. Appropriate discount rate. iii. Justified value per share.
(b) Determine and explain briefly whether Tom should buy common stock of ABC Company. (c) Identify any THREE weaknesses for using constant perpetual growth model to evaluate stock price.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started