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Today is January 31, 2018. A firm has a book-value-per-share of $10. You are modeling a stock price using Residual Earnings model . You have...
Today is January 31, 2018. A firm has a book-value-per-share of $10.00.
You are modeling a stock price using Residual Earnings model. You have calculated the residual earnings to be $5.41 and $6.77 for period ending January 31, 2019 and January 31, 2020 respectively. The required return for this stock is 8%.
You are comfortable with a 2-year forecast. However, you are uncertain regarding the long-term growth rate that you should use to obtain the intrinsic value.
The market price on January 31, 2018 is $52.12 per share.
If your expectations regarding residuals earnings on January 31, 2019 and January 31, 2020 are correct, what is the long-run growth rate implied by the current market price? Use the Residual Earnings model and solve for long-run growth rate.
