1) TwitterMe, Inc., is a new company and currently has negative earnings. The co
ID: 2771418 • Letter: 1
Question
1) TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1.2 million and there are 114,000 shares outstanding. If the benchmark price–sales ratio is 3.4, what is your estimate of an appropriate stock price? What if the price–sales ratio were 2.9?
2)Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 26 percent for the next three years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 15 percent, and the company just paid a dividend of $3.55, what is the current share price?
Explanation / Answer
Answer 1) If benchmark price to sales ratio is 3.4, Market cap = 3.4 * Sales = 3.4 * 1,200,000 = 4,800,000
Price = 4,800,000/114,000 = $ 35.7895
If Price to sales is 2.9, Price = 2.9*1,200,000/114,000 = $ 30.5263
Answer 2) P = D1/(1+k) + D2/(1+k)^2 + D3/(1+k)^3 + D4/(k-g)(1+k)^4
Where k is 15%, D0 is 3.55, D1 = 3.55* 1.26 = 4.473, D2 = 5.6360, D3 =7.1013 and D4 is D3*1.08 = 7.6694
Solving this P = 110.2381
Calculation Dividend Dn/(1+k)^n Dn/(K-g)(1+k)^n Total D0 3.55 D1 D0*1.26 4.47 3.889565217 3.889565 D2 D1*1.26 5.64 4.900852174 4.900852 D3 D2*1.26 7.10 6.175073739 6.175074 D4 D3*1.08 7.67 95.27256626 95.27257 Total 110.2381Related Questions
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