Estimate the value per share

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Reference no: EM132162489

Question -

a) ABC ltd reported a significant loss of Ksh.2.74 per share in 2009 but reported positive earnings per share (EPS) of Ksh.1.38 in the following year, as sales improved and profit margins increased. The improving economy is expected to quadruple earnings in 2011., after which earnings growth is expected to stabilize at 5% in the long term.ABC Ltd also reported capital spending per share of Ksh.5.50 and depreciation per share of KSh.4.5 in 2010 and both items are expected to grow at 5% a year in the long term. Assume a risk premium of 6 %. The working capital for the firm amounted to Ksh. 2.50 per share in 2010 and was expected to grow at 3% a year in the long term.

The beta for the stock is 1.25, but it is expected to stabilize at 1.10 after 2011. The firm expects to maintain a debt-equity ratio of 4%. The treasury bond rate stands at 7% and the risk premium is 5.5%.

Required:

i) Estimate the value per share.

ii) How sensitive is this estimate to assumptions about growth in the year 2011.

b) Briefly discuss the misconceptions (myths) about valuation.

c) Discuss the various valuation approaches clearly stating their limitations and suitability in various types of valuation (IPO private Company etc.

Reference no: EM132162489

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