Analyst Debra Williams must decide whether to invest in one of two stocks (A and B). Both A and B are trading at $100 per share.

Her forecasts for company A as of the beginning of 2016 are the following:

Assume Terminal growth in perpetuity 3.5%; cost of capital 9%; 10 million shares outstanding.
 

Forecast  ($ millions)	2016	2017	Terminal Value
Net Income	100	108	113
Dividend	10	11	13
Beginning Book Value of Equity	900
Residual NI
Discount Factors:	1	2	3
Present Value of $1 at 9%	0.917	0.842	0.772

(a) Based on the assumptions above, what is the intrinsic value of A's stock at the beginning of 2016?

Williams estimates that company B has reached its steady state. The beginning book value of equity is 100 per share; current ROE is 9%; cost of capital 9%; and perpetual growth is expected to be 3.5%. 

(b) Based on the assumptions above, what is the intrinsic value of B's stock?

(c) Which stock should Williams buy? Why?
 

Answer rating: 100% (QA)

a The IV of stock a To calculate the IV of stock a present value of cash flows should be taken along ... View the full answer