Question: Given the following information, answer the question step by step. Tom works in XYZ company. Tom, a portfolio manager, is evaluating common stock value of

Given the following information, answer the question step by step.

Tom works in XYZ company.

Tom, a portfolio manager, is evaluating common stock value of ABC Company. He decides to use Constant Perpetual Growth Model for the evaluation and obtains the following information related to ABC Company and market: ABC Company Latest dividend per share paid: $1.5 Earnings per share: $2.0 Book value per share: $12.5 Asset beta: 1.2 Debt-to-equity ratio: 60% Tax rate: 25% Existing share price of common stock: $20

Market

Risk-free rate: 2% Market risk premium: 8%

(a) Compute the following figures: i. Sustainable growth rate. ii. Appropriate discount rate. iii. Justified value per share.

(b) Determine and explain briefly whether Tom should buy common stock of ABC Company. (c) Identify any THREE weaknesses for using constant perpetual growth model to evaluate stock price.

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