Now is the end of 2007. ABC ltd. is a telecoms firm on the stock exchange of Hon

Question

Now is the end of 2007. ABC ltd. is a telecoms firm on the stock exchange of Hong Kong. Your broker called again advising you to buy the stock. The stock is currently trading at $8.79, down from $10.80 a year ago. The price had been $15 two years ago but arbitrageurs considered it overvalued and sold it short. This resulted in a significant price decline. You are asked to:

a. Estimate the company's cost of equity, cost of debt. and weighted average cost of capital (WACC).

b. Estimate the company's stock price. The firm has just paid a dividend of $2.03 and dividends are forecasted to grow at a modest 2% per year. Should you buy the stock?

The corporate tax rate is 16%. The firm's debt/equity ratio is 42.86%. The yield on Hong Kong's one-year Exchange Fund Notes is 2.3%.

You have identified China Mobile, China Unicom, Hutchison Telecom, Hycomm Wireless, PCCW, and Smartone Telecom as the major competitors. Their current Beta () are summarized in the table below:

Betas () of major telecom firms listed on the Stock Exchange HK (SEHK) in 2007

China Mobile 0.85 China Unicom 1.15 Hutchison Telecom 1.25 Hycomm Wireless 1.59 PCCW 1.55 Smartone Telecom 1.18

Explanation / Answer

Here, bend strength is, length is L, width is t, depth is 2c, and fracture load is .

Substitute 40 mm for L, 192 N for , 4.01 mm for t, and 1.505 mm for c.

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