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?

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 years market return is 10%, and T-bills currently offer a 5.0% return. Absenthias net profit margin for the revenant accouting 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 (Hint: review the Dupont decomposition and the CAPM). 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 Absenthias managers?

c. Assume that instead of having a payout ratio of 0.6, Absenthia Inc would pay all earnings as dividends (i.e. a cash cow firm). Calculate the value of Absenthia Inc as a cash cow firm.