Question

Q8.8. An analyst produces the following set of forecasts for company F: Year t+1 Y ear t+2 Profit or loss €100 €100 Dividend payout ratio 50% 50% Year t+3 €100 50% At the end of year t, the book value of company F’s equity is €500. Company F has no debt and its cost of equity is 10 percent. The analyst expects that in and after year t+4, company F will earn abnormal profits on the revenue it had in year t+3, but earn zero abnormal profit on incremental revenues beyond that level. Under these assumptions, the analyst’s estimate of company F’s equity value at the end of year t is :

A. €642.75

B. €885.90

C. €913.22

D. €1012.70

Answer 1