Question
Problem 1. The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25%
Problem 1. The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% for the next 3 years and then level off to 5% per year forever. You think the appropriate market capitalization rate is 20% per year. (3 pts.)
What is your estimate of the intrinsic value of a share of stock?
If the market price of a share is equal to this intrinsic value, what is the expected dividend yield?
What do you expect its price to be 1 year from now? Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate?
Problem 2. Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis (3 pts):
Forecast industry earnings retention rate | 40% |
Forecast industry return on equity | 25% |
Industry beta | 1.2 |
Government bond yield | 6% |
Equity risk premium | 5% |
Compute the price-to-earnings (P0/E1) ratio for the industry based on the fundamental data.
Jones wants to analyze how fundamental P/E ratios differ among countries. He gathered the following economic and market data:
Fundamental factors | Country A | Country B |
Forecast growth in real GDP | 5% | 2% |
Government bond yield | 10% | 6% |
Equity risk premium | 5% | 4% |
Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or higher for country B.
Problem 3. A firm has an ROE of 3%, a debt-to-equity ratio of 0.5, a tax rate of 35%, and pays an interest rate f 6% on its debt. What is its operating ROA? (3 pts)
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