Homework Chapter 14 week 7

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

a. The next 10 years

b. The next 5 years

PROBLEM 7: You are given the following information about two computer software firms and the S&P Industrials

—————————-Company A——————-Company B————–S & P Industrials

P/E Ratio 30.00 27.00 18.00

Expected annual growth rate 0.18 0.15 0.07

Dividend yield 0.00 0.01 0.02

a. Compute the growth duration of each company stock relative to the S & P Industrials.

b.

c. Given these growth durations, what determines your investment decision?

Problem 8: The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the set’s present value. A dividend valuation model such as the following is frequently used. Pi= D1

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