(Nonconstant Growth Valuation)
A company currently pays a dividend of $2 per share (D0 = $2). It is
estimated that the company’s dividend will grow at a rate of 20% per
year for the next 2 years, then at a constant rate of 7% thereafter. The
company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the
market risk premium is 4%. What is your estimate of the stock’s current
price?
Click here for the solution: (Nonconstant Growth Valuation) A company currently pays a dividend of $2 per share (D0 = $2)
Showing posts with label growth. Show all posts
Showing posts with label growth. Show all posts
Tuesday, July 14, 2015
Friday, July 3, 2015
Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation
Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data:
Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20
DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.
1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?
Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation
Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20
DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.
1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?
Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation
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