Problem 2 -- Value of Aussie Applications Inc. (API) Stock Aussie Applications I

Question

Problem 2 -- Value of Aussie Applications Inc. (API) Stock Aussie Applications Inc. (API) has been growing at rate of 16.4% per year in recent years. This same growth rate is expected to last for another two years, then decline to g = 6%. a. If D = $2.60 and rs 12%, what is API?s stock worth today? b. Now assume API?s period of supernormal growth lasts for 4 years instead of only 2 years. What is API?s stock now worth today? a. If D g $2.60 and rs = 12%, what Es API?S stock worth today? b. ... API?s period of supernormal growth lasts for 4 years instead of only 2 years. ______________ What is API?S stock now worth today?

Explanation / Answer

a) D1 = 2.60*(1+16.4%) = $3.03

D2 = 3.03*(1+16.4%) = $3.53

D3 = 3.53*(1+6%) = $3.74

Price = 3.03/(1+12%)+3.53/(1+12%)^2+(3.74/(12%-6%))*(1+12%)^(-3)

=$49.89

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b) D1 = 2.60*(1+16.4%) = $3.03

D2 = 3.03*(1+16.4%) = $3.53

D3 = 3.53*(1+16.4%) = $4.11

D4 = 4.11*(1+16.4%) = $4.78

D5 = 4.78*(1+6%) = $5.07

Price = 3.03/(1+12%)+3.53/(1+12%)^2+4.11/(1+12%)^3+4.78/(1+12%)^4+(5.07/(12%-6%))*(1+12%)^(-4)

=$65.18

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