Mr. Steven Trump adopts the following valuation model (residual income model) to measure the intrinsic value shares issued by AA corporation that Mr. Trump invested (all per share numbers in case of net book value and residual earnings): RE: REX g v = B + pg PEx (8-9) where vf = intrinsic firm value (per share) measured at present RE+ B. net book value per share = $ 12.67) at present RE: residual income (earnings) forecast for 1 year ahead (= $ 1.713) RE: = residual income (earnings) forecast for 2 years ahead - $ 1.755) DE 1 + cost of equity S 10% per year) 1 + long-term (constant and perpetual) growth rate (per year) in residual earnings forecast after 2 years ahead Requirement 1: Assuming Mr. Trump believes that the current market price per share ($40.82) reflects precisely the intrinsic value of his equity investment, how much is the long-term annual growth rate (constant and perpetual after 2 years ahead) in residual earnings forecast of Mr. Trump. Requirement 2: If the average long-term growth rate of residual earnings of the entire stock market is forecasted to be 2.5% per year, what is your investment advice to Mr. Trump. |