Explain the basic assumption of economics with respect to rational self-interest. Describe two detailed real-life examples apply
1 answer:
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Answer:
Explanation:
From the given information:
The current price =
2. The value of the stock
Calculate the earnings at the end of 5 years:
Terminal value year 5 =
=$75.526
Discount all potential future cash flows as follows to determine the stock's value:
=$ 54.1945
As a result, the analysts value the stock at $54.20, which is below their own estimates.
3. The value of the stock
Calculate the earnings at the end of 5 years:
Terminal value year 5 =
=$53.8773
Discount all potential cash flows as follows to determine the stock's value:
=$39.460
As a result, the price is $39.460, and the other strategy would raise the value of the shareholders. Not this one, since paying a 100% dividend would result in a price of $54.20, which is higher than the current price.
Notice that the third question depicts the situation after 5 years, but the final decision will be the same since we are discounting in current terms. If compounding is used, the future value over 5 years is just the same as the first choice, which is the better option.
The presumption in the second portion is that after 5 years, the steady growth rate would be the same as measured in the first part (1).