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This morning, you arrived at your job as Head of Client Advisory Services for a major investment firm and received a distressing phone call. Mrs. Smith, one of your best clients, who just happened to become your mother in law shortly after her retirement, has passed away.As the investment expert in the family, it will be your task to values Mrs. Smith’s substantial estate, which consists mostly of stock investments which you have recommended. Making your task complicated is the fact that following your advice, Mrs. Smith has invested mostly in companies whose stocks are not publicly traded or listed. As a matter of fact, most of Mrs. Smith’s investments are in companies headed by some of your college buddies.Mrs. Smith’s portfolio consists of the 10 stocks described below. Your task is to value each individually and aggregate the values to come up with the total value of Mrs. Smith’s estate. As one of the heirs, you are highly motivated to come up with the correct valuation.1. 3,000 shares of E&E Online booksellers that just paid a dividend of $3.50. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 14 percent return on the stock for the first three years, a 12 percent return for the next three years, and a 10 percent return thereafter.2. 100 shares of Up All Night Video Games, Inc. This is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. The required return on this stock is 14 percent.3. 2,500 shares of Cake in a Cup Bakeries, a rapidly growing company. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. The required return is 13 percent and the company just paid a $1.80 dividend.
This morning, you arrived at your job as Head of Client Advisory Services for a major investment firm and received a distressing phone call. Mrs. Smith, one of your best clients,who just happened…
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