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In: Finance

When a stock is going through a period of nonconstant growth for T periods, followed by...

When a stock is going through a period of nonconstant growth for T periods, followed by constant growth forever, the residual income model can be modified as follows:

P0 = T EPSt + Bt−1 − Bt + PT
Σ (1 + k)t (1 + k)T
t = 1

where

PT = BT + EPST (1 + g) − BT × k
k − g

Al’s Infrared Sandwich Company had a book value of $21.50 at the beginning of the year, and the earnings per share for the past year was $8.65. Molly Miller, a research analyst at Miller, Moore & Associates, estimates that the book value and earnings per share will grow at 19.50 and 18.00 percent per year for the next four years, respectively. After four years, the growth rate is expected to be 6 percent. Molly believes the required return for the company is 11.00 percent. What is the value per share for Al’s Infrared Sandwich Company? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Solutions

Expert Solution

Value per share =223.02

Calculations: k (required return) = 11%

jeff jeffy answered 2 years ago
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