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.




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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