Question

In: Economics

Say you are a stock analyst who gives "buy" or "sell" recommendations on the stocks you...

Say you are a stock analyst who gives "buy" or "sell" recommendations on the stocks you analyze and that Growth-Tech (GT) is one of these stocks. If Growth-Tech's stock is currently trading at $27, what recommendation would you issue? Your EPS projections for GT are as follows: 0.5, 0.6, 1.15, and 1.24 per share for each of

the next four years. You believe growth is 8% long term and that the cost of capital is 12%.


Solutions

Expert Solution

We need to estimate the present value of the EPS from this stock as follows:

firstly the PV of the given EPS, which is $2.53.

Time EPS PV = EPS / 1.12^time
1 0.5                                    0.45
2 0.6                                    0.48
3 1.15                                    0.82
4 1.24                                    0.79
Total                                    2.53

then the PV of the terminal PV which is growing. It will be EPS / (r-g) = $1.24*1.08 / (0.12-0.08) = $33.48. But this is at the end of Y5. So we discount it to its present value: $33.48 / 1.12^5 = $19

The total is $2.53+$19 = $21.53

Hence my recommendation woudl be sell.


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