Investors pay a premium when they acquire companies with a high growth potential. This was clearly witnessed
Question:
Investors pay a premium when they acquire companies with a high growth potential. This was clearly witnessed in 2020, when the share prices of several technology companies skyrocketed, despite the economic devastation of the COVID-19 pandemic. Many value investors warned that investors were overpaying for the potential growth promised by these companies.
Company D's current market price is R1 210.00 per share. In 2020, the company paid a dividend of R12.10 per share. Next year's dividend is expected to increase by 12.0% and decrease linearly over the next ten years to a long-term stable growth rate of 4.0%. The risk-free rate is 3.5% and the investors require a risk premium of 6.0% to invest in equities. Company D's beta is estimated to be 1.1, implying that its cost of equity is 10.1%.
Calculate the value of stable growth.
Calculate the value of extraordinary growth.
Based on Company D's current market price, what is the implied value of growth?
As a portfolio manager, would you purchase Company D? Motivate your answer.
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw