As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a"hold" recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensiveanalysis of the industry and you feel that the probability the firm will capture a substantial share of the newmarket is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at arate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to theunusually high growth rate of future earnings. However, you feel there is a 35-percent probability that thefirm will face serious difficulties in the near future, in which case the stock price will fall to $114, and theearnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for thefirm and its earnings growth rate will remain at 12 percent.Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125and final answer to O decimal places, e.g. 145.)Expected price$150

To calculate the expected price in the future, we need to consider the probabilities and potential…

Answered: As an analyst for Kingbird Inc., you…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Garret Simpson Investments is evaluating a firm (Garp, Inc.) for recommendation to its clients and trying to evaluate the firm's current stock price. The firm is about to offer its shares to the public and had earnings last year of $2.50 a share, which the analysts believe is expected to grow by 20% next year. Similar firms in the industry are currently selling for price-earnings ratios ranging from ten to fifteen times current period earnings. However, these competitor firms are already public entities and have relatively low growth expectations for their earnings. What is your estimate of an appropriate price range for the shares of Garp? Defend your answer.
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Innovative Group Ltd, an IT company, is undertaking a new project to develop software for Fair Supermarkets. As such, it is expected that the company has an ROE of 24% and a plowback ratio of 0.30. The forecasted earnings of the company for the first year from now are $2 per share. Investors expect a 12% rate of return on the company’s stock. a.Calculate the price at which this company’s stock should sell using the constant-growth dividend discount model. Your valuation in part (a) is based on the new project undertaken by the company to develop software for Fair Supermarkets. However, recent developments have informed you that the company will not be able to continue to do this project for Fair Supermarkets. Based on this new information you have revised your estimates regarding the company’s prospect and forecasted that the company’s dividend is $0.50 per share for the first year from now and $1.00 per share for the second and third years from now. After that the company’s…
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Raymond Reddington is a sell-side analyst for JP Morgan and covers the electronics industry. Based on his experience, he believes the appropriate way to model the intrinsic value of companies in this industry is the following weighted average: 25% dividend discount model, 40% P/E multiple, and 35% P/Book multiple. He has the following information at his disposal in his attempt to value Great Gadgets. For FY 19, Great Gadgets has $350M of liabilities and $400M in assets. Great Gadgets had $200M in sales, COGS were $115M, and SG&A expenses were $35M. Depreciation was $10M and Great gadgets paid taxes of $10M and interest on its debt of $5M. Great Gadgets has 2M shares outstanding. Great Gadgets has a beta of 0.9. The risk-free rate is 4% and the expected return of the market is 10%. Raymond expects them to issue dividends of $6, $9, and $11 in exactly 1 year, 2 years, and 3 years, respectively. After that, he expects dividends to increase by 3% per year indefinitely. Raymond…

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