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Formalities:

· Wordcount: 900 words maximum, 600-900 words normal

· Font: Arial 12,5 pts.

· Text alignment: Justified.

· The in-text References and the Bibliography have to be in Harvard’s citation style.

Submission:

Weight:

It assesses the following learning outcomes:

· To be able to conduct equity valuation

· Understand the idea of valuation using comparables

Exercise 1 (20 points):

XYZ tech is based in European Union. Share price of XYZ is traded at 62 euro per share. Company is paying dividends once a year. Expected dividend next year is about 1.25 euro per share. Return on equity is equal to 0.12.

Question 1.1:

Using Gordon model find implied growth rate of the company XYZ (10 points)

Question 1.2:

You are worrying that company might be overvalued. Forward P/E ratio in tech sector is about 20. Analysts (whom you trust) expect that earnings per share will be 2 euro per share. Use relative (multiples) valuation method to estimate “fair” share price. Compare your estimate to the actual share price and make a conclusion whether company is overvalued or no? (10 points)

Exercise 2 (30 points):

Procter & Gamble will pay an annual dividend of \$1 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. What is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 10%?

Exercise 3 (20 points):

(a&b 10 points each):

Exercise 4 (12 points): Theoretical question (150 words maximum)

Explain what are the pros and cons of the comparable/multiples valuation of the stocks? What are the most popular multiplicators for stock valuation?

Exercise 5* (8 points): Practical valuation using P/E ratio.

Pick a stock of the publicly traded US-based company of your choice. What is the industry of the company? Use average industry P/E ratio and EPS (earnings per share) of the company to define the “fair” price of the stock.

Hint: you might find this data useful: