In: Economics
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%.
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.