Question: A buy-side equity analysts from Oppenheimer & Co. is using abnormal earnings growth model to analyze the value of a biotech firm, THY Co. as
A buy-side equity analysts from Oppenheimer & Co. is using abnormal earnings growth model to analyze the value of a biotech firm, THY Co. as of December 31st, 2012. Below are his forecasts for over 2013-2015.
|
|
| 2013 | 2014 | 2015 |
| Cash & Cash Equivalents |
| $500.00 | $550.00 | $650.00 |
| Marketable Securities |
| $300.00 | $350.00 | $450.00 |
| Accounts Receivables |
| $350.00 | $400.00 | $500.00 |
| Inventory |
| $150.00 | $200.00 | $260.00 |
| Property and Equipment |
| $800.00 | $850.00 | $950.00 |
| Goodwill |
| $250.00 | $350.00 | $300.00 |
| No of Shares outstanding |
| 300.00 | 300.00 | 300.00 |
Total Asset Turnover is 3 and fixed indefinitely.
Profit Margin is 25% and fixed indefinitely.
Divident payout ratio is 10% and fixed indefinitely.
Re equals 10%.
The analyst expects a shift in the growth of AEG after 2015. Specifically, due to abnormal shocks to the THYs operations (i.e., product launch), THY is expected to increase its long-term growth rate from 5% to 9% in a linear manner in six years after 2015 and then will linearly converge back to the mature period growth rate of 5% in a 4-year period. The long-term growth rate will then be fixed at 5% after this convergence.
Please compute fair price at the end of 2012 using AEG model. Please indicate whether this is an optimistic (bull) or a pessimistic (bear) forecast
What is the fair stock price assuming that THY Co. will sustain the short-term jump growth rate (i.e., 9%) indefinitely as the companys proprietary technology allows it to sustain its competitive advantage in the long-term. Please indicate whether this is an optimistic (bull) or a pessimistic (bear) forecast
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