A friend tells you that you should buy AST Company stock as it is a great deal.
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Question:
A friend tells you that you should buy AST Company stock as it is a "great deal." It is January 1, 2020 and the stock is trading at $25 per share. You obtain the financial statements for Leclerc and determine the following:
- Book value is $12 per share as of December 31, 2019.
- Earnings for 2019 were $4.0 per share.
- Earnings are expected to grow at 20% for the next four years.
- Dividend payout is 40%.
- Residual income is expected to be zero from 2021 onwards.
- Cost of equity capital is 15%.
Determine, using the residual income method, whether you should buy AST stock as of January 1, 2020.
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