Question
Yahoo!'s growth in 2008 was expected to be 20%, but that this growth was expected to decay by 1.25% each year through 2017. In 2018
Yahoo!'s growth in 2008 was expected to be 20%, but that this growth was expected to decay by 1.25% each year through 2017. In 2018 and beyond, growth is expected to be 6.0%. Now assume that a Microsoft-Yahoo combination could result in a $1 billion per year savings in costs. It will take 4 YEARS to implement the full cost savings of $1 billion. That is, only $250 million in cost savings is realized in the first year, $500 million in the second year, $750 million in the third year, and the full $1 billion in subsequent years .But now consider analysts' views that Microsoft could generate additional growth in Yahoo!'s sales and earnings. Investigate the initial rate of growth in 2008 that is necessary to justify a valuation of Yahoo! of $31.00 per share. (Continue to assume that the 2008 growth will decay by 1.25% per year through 2017, and that growth in 2018 and beyond will be 6%.)
What does the year 2008 growth rate have to be to justify a value of $31.00 per share?
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