Retail fund manager Seymour Simms is considering the purchase of shares in upstart retailer Hot Topic Stores

Question:

Retail fund manager Seymour Simms is considering the purchase of shares in upstart retailer Hot Topic Stores (HTS). The current book value of HTS is $ 20 per share, and its market price is $ 35. Simms expects long - term ROE to be 18 percent, long - term growth to be 10 percent, and cost of equity to be 14 percent. What conclusion would you expect Simms to arrive at if he uses a single - stage residual income model to value these shares?

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...

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