Answer E Only

2. Equity Valuation The current stock price of Absenthia Inc is $72 per share (end of 2015). The current dividend per share (for 2015) is $5.5. According to financial results of FY15 (financial year 2015). Absenthia Inc has Equity multiplier of 7.5, Asset turnover ratio of 0.55 and gross profit margin of 3.9%. According to most analysts, Absenthia Inc has a beta of 1.9, the coming year's market return is 10%, and T-bills currently offer a 5.0% retum. Absenthia's net profit margin for the revenant accounting period is 3.2%. The firm plans to maintain indefinitely its traditional payout ratio of 0.6 a) Calculate a constant-growth DDM value for Absenthia Inc at the end of 2015 and compare the computed value to its actual stock price. What do you conclude? What this result implies for Absenthia and for the financial decision making of Absenthia's managers? b) Assume an investor purchases a number of shares of stock of Absenthia at the end of 2015 and holds the shares only for one year. Assuming market efficiency in 2016, calculate the holding period return (HPR) for this investor. Plot the security market line (SML), and depict the stock of Absenthia in this graph. Conclude. Given this result, if this investor would be a smart arbitrageur, what she should do and what her behavior implies for Absenthia? c) Assume that instead of having a payout ratio of 0.6Absenthia Inc would pay all earnings as dividends (i.e. a cash cow firm). Calculate the value of Absenthia Inc as a cash cow firm. d) How would you interpret the difference between the values calculated in (a) and (c)? Would you conclude that Absenthia Inc. is currently creating value for its shareholders, or not? Why? e) Actually, Absenthia Inc could grow more rapidly (at 15%) over the next three years (2016, 2017, 2018) and then settle in at a lower but sustainable rate of growth from 2019 onwards. 1. Calculate the two-stage DDM value for Absenthia Inc and compare the computed value to its actual stock price. Conclude. What this result implies for Absenthia and for the financial decision making of Absenthia's managers? 2. Assume an investor purchases a number of shares of stock of Absenthia at the end of 2015 and holds the shares only for one year. Assuming market efficiency in 2016, calculate the holding period return (HPR) for this investor. Plot again the security market line (SML), and depict the stock of Absenthia in this graph. Conclude. Given this result, if this investor would be a smart arbitrageur, what she should do and what her behavior implies for Absenthia