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##### Suppose that the consensus forecast of security an...

**Description**

Solution

**Question**

Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be E1 = $5.00 per share. Suppose that the company tends to plow back 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the company?s growth rate will be 8% from now onwards, answer the following questions. a) If your estimate of the company?s required rate of return on its stock is 10%, what is the equilibrium price of the stock? b) Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock?s required rate of return; or (ii) the CFO?s estimate of the company?s future growth rate? c) Suppose your own 10% estimate of the stock?s required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the market?s estimate of the company?s growth rate?

Paper#4267 | Written in 18-Jul-2015

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