Swanson's stock today
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1) During the past few years, Swanson Company has retained, on the average, 70% of its earnings in the business. The future retention rate is expected to remain at 70% of earnings, and long-run earnings growth is expected to be 10%. If the risk-free rate, kRF, is 8%, the expected return on the market, kM, is 12%, Swanson's beta is 2.0, and the most recent dividend, D0, was $1.50, what is the most likely market price and P/E ratio (P0/E1) for Swanson's stock today?
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Solution Summary
Swanson's stock today is carefully determined.
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1)
NI = 50
Debt = 1000 (million)
Interest expenses = 100
Depreciation = 100
Capital expense = 100*200% = 200
Cost of capital = k = 11%
g = 4%
risk premium = 5.5%
t = 40%
First, we need to estimate the firm's free cash flow (FCF).
FCF = NI + Interest expenses - (Interest ...
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