Homework Chapter 14 week 7

PROBLEM 6:  Lauren Entertainment, Inc., has an 18 percent annual growth rate compared to the market rate of 8 percent.  If the market multiple is 18, determine P/E ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel t can maintain its superior growth rate for:

a.        The next 10 years

b.      The next 5 years

PROBLEM 7:  You are given the following information about two computer software firms and the S&P Industrials

—————————-Company A——————-Company B————–S & P Industrials

P/E Ratio                                                  30.00                                  27.00                                      18.00

Expected annual growth rate                0.18                                     0.15                                        0.07

Dividend yield                                         0.00                                      0.01                                        0.02

a.       Compute the growth duration of each company stock relative to the S & P Industrials.

b.

c.       Given these growth durations, what determines your investment decision?

Problem 8:  The value of an asset is the present value of the expected returns from the asset during the holding period.  An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the set’s present value.  A dividend valuation model such as the following is frequently used.      Pi= D1

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