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Suppose that you have collected the following information for your firm's stock. Next dividend payment (per share) = $2. o Next meaning paid after
Suppose that you have collected the following information for your firm's stock. Next dividend payment (per share) = $2. o Next meaning paid after one period. Dividends are growing at a rate of 2% per year. Cost of equity capital = 15%. . Firm Industry Average Price/Book 1.8 2.5 Price/Earnings 2.0 3.0 Part A (4 marks): Use both the price-to-book ratio and price-earnings ratio to comment on whether your firm's equity is overvalued, undervalued, or fairly valued. Be sure to explain your answer. Part B (3 marks): Suppose your firm requires capital to make a particularly attractive investment. Based on your answer to part A, would it make sense to finance this investment with a stock issuance? Explain why or why not. Part C (3 marks): What is the price per share based on the dividend discount model? Bonus: How would the standard deviation of industry price ratios (P/E and P/B) influence your answer to Part A?
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Part A To determine whether the firms equity is overvalued undervalued or fairly valued we compare its pricetobook PB ratio and priceearnings PE ratio ...Get Instant Access to Expert-Tailored Solutions
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