Hi. could you please help me with these 2 questions thanks 6- Lauren Entertainme

Question

Hi.

could you please help me with these 2 questions

thanks

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 ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel it can maintain its superior growth rate for:

a.            The next 10 years.

b.            The next 5 years.

10-The constant growth dividend discount model can be used both for the valuation of companies and for the estimation of the long term total return of a stock.

Assume $20= price of a stock today

               8%= Expected growth rate of dividends

               0.60= Annual dividend one year forward

a- Using only the preceding data, compute the expected long-term total return on the stock using the constant growth dividend discount model.

b- Briefly discuss three advantages of the constant growth dividend discount model in its application to investment analysis.

c- Identify three alternative methods to the dividend discount model for the valuation of companies.

Explanation / Answer

The next 10 years.
Solution: Computation of the P/E Ratio

10 ln (1.18/1.08)
10 ln (1.09259)
10 (0.08855)
0.8855
2.424

ln (x) =
ln (x) =
ln (x) =
ln (x) =
(x) =

33.936

Hence , the P/E ratio would be

(2.424 x 14)

b. The next 5 years
Solution: Computation of the P/E Ratio

5 ln (1.18/1.08)
5 ln (1.09259)
5 (0.08855)
0.44275
1.55698

ln (x) =
ln (x) =
ln (x) =
ln (x) =
(x) =

21.79772

Hence, the P/E ratio would be

(1.55698*14)

10.-

(A.)Expected Return = k = D1/Po + g = .60/20 +.08 = 11%

B. The model assumes that the dividend growth rate is forever constant. Therefore, the model cannot be applied to firms that currently do not pay dividends. Second, the model is inappropriate when g > k (which presumably cannot persist indefinitely). Third, the model cannot handle firms with variable dividend growth paths.

C. One can use either P/E multiples or market-to-book multiples exhibited by other firms in the same industry

Expected Return = k = D1/Po + g = .60/20 +.08 = 11%

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