(Solution Download) Determining the Value of a Business Based on the background

1. Based on the background information, what are the highest and lowest values of the stock based on P/E ratios?


2. What has been the firms earnings growth rate (i.e., the rate of growth from $6.70 to $8.50) for the prior five years?


3. What are the highest and lowest values of the stock based on the dividend-growth model?


4. What assumptions must be made to determine these values using these two techniques?


5. Explain the impact each of the following would have on the valuation of the stock:


a) The anticipated return on the market rises.


b) The rate of growth declines.


c) The average P/E is 15 instead of 12.


6. What is the tax implication if the stock is sold for more than the $100 used to value the stock for the estate?











Amanda Monaco has just inherited her fathers company. Prior to his death, Mr. Monaco was the sole stockholder, and he left the entire company to his only daughter. Although Amanda has worked for the firm for many years as a commercial artist, she does not feel qualified to manage the operation. She has considered selling the firm while it is still a viable operation and before her fathers absence causes the value of the firm to deteriorate. Amanda realizes that selling the firm will result in losing control, but her father granted her a long-term contract that guarantees employment or a generous severance package. Furthermore, if Amanda were to sell for cash, she should receive a substantial amount of money, so her financial position would be secure.



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