Use the following information to answer the questions. The made up company name is ABC.
Price: $20
R: 12%
G: 4%
D0: 1.10
P/E: 16
EPS: 1.25
Analyst E growth: 7%
Now answer the following below using the above information that’s provided:
· Part A-Fundamental Valuation:
1. Estimate a growth rate for your firm's Dividends per Share.
2. Assume a 12.5% discount rate.
3. Calculate an estimated value of a share of the stock using the constant-growth model (Eq. 8-6 in the textbook), also known as the Gordon growth model.
4. Compare and contrast your valuation results with the current share price in the market.
5. Respond to this question: What changes in the variables would be necessary in your valuation to best approximate the market valuation?
· Part B - Relative Valuation:
6. Estimate a growth rate for your firm's Earnings per Share (EPS).
7. Determine an applicable Price-Earnings (P/E) ratio for your firm in 5 years.
8. Calculate an estimated value of a share of the stock in 5 years using the P/E ratio model (Eq. 8-10 in the textbook).
9. Respond to this question: Would you characterize your stock as undervalued or overvalued? Explain.
10. Respond to this question: Based on your valuations in parts A and B, would you invest in this stock? Explain.