1. You want to estimate the price of an ABC share. ABC is not listed, so you...
Question:
1. You want to estimate the price of an ABC share. ABC is not listed, so you cannot simply get the price from stock exchange data. You know however that next year ABC will pay a dividend of $ 50 per share. Two years from now, the dividend is expected to be $ 55 per share. Following that, Dividends are expected to grow at 2% per year in perpetuity, and ABC’s eq- uity cost of capital is estimated at 12% per year. What would be a reasonable estimate of ABC’s share price based on this information?
2. You want to estimate the price of an Aquarius share. Aquarius is not a listed company. You want to use the information on another company, Sagittarius Inc., which is listed and quite similar to Aquarius. Sagittarius has 200,000 shares with a cur- rent share price of $27 per share and has issued 50,000 bonds with a face value of $ 1000 and a current market price of $ 1020. Its EBITDA last year was $ 7,500,000. Aquarius has total debt of $ 5,500,000, and its equity is divided into 100,000 shares. Its EBITDA last year was $2,440,000. What is a good estimate of Aquarius’s share price based on this information?
3. Shark Inc. has currently has 2,000,000 shares. It expects to have a net income of $ 50,000,000 next year, it expects the net income to grow at 1% per year in perpetuity, and it plans to pay out half of the net income as dividends. Starting three years from now, Shark also expects to spend $ 2,000,000 every year on repurchasing shares. Shark’s annual equity cost of capital is 10%. What is Shark’s likely share price?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta