The market''s estimate of the company''s growth ratete
Course:- Finance Basics
Reference No.:- EM13269539

Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Finance Basics

Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be E1 = $5.00 per share. Suppose that the company tends to plow back 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the company's growth rate will be 8% from now onwards, answer the following questions.
a) If your estimate of the company's required rate of return on its stock is 10%, what is the equilibrium price of the stock?
b) Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock's required rate of return; or (ii) the CFO's estimate of the company's future growth rate?
c) Suppose your own 10% estimate of the stock's required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the market's estimate of the company's growth rate?

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Finance Basics) Materials
Elaborate the findings by comparing domestic and international corporations. Include information on international capital budgeting and the impact on taxations, bankruptcy c
Mullineaux Company has a target capital structure of 60 percent common stock, 5% preferred stock, and 35% debt. Its cost of equity is 14 percent, the cost of preferred stock i
A new bank has vault cash of $1 million and $5 million in deposits held at its Federal Reserve District Bank. If the required reserves ration is 8 percent, what dollar amoun
“If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case. What is Dill’s weighted a
Term life insurance is considered "pure insurance." Personal risk management is a systematic process of identifying, evaluating, and managing pure risk exposures faced by an
When capital markets are perfect, except for corporate taxes, what is the optimal level of debt the company should issue? In reality, do we observe firms that maintain this
When Tallman Haberdashery, Inc., merged with Meyers Men's Suits, Inc., Tallman's employees were switched from a weekly to a biweekly pay period. Tallman's weekly payroll amoun
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product be