Using the Data Below, Employ a Constant Perpetual Growth Model

question 114

Essay

Using the data below, employ a constant perpetual growth model to determine whether LOL stock is overvalue or undervalued.
LOL Stock
Closing Price - $105
Beta - 0.82 $$\begin{array} { | l | r | r | r | r | r | } \hline \text { Year } & \mathbf { 2 0 0 8 } & \mathbf { 2 0 0 9 } & \mathbf { 2 0 1 0 } & \mathbf { 2 0 1 1 } & \mathbf { 2 0 1 2 } \\\hline \text { Dividend per Share } & \$ 1.00 & \$ 1.06 & \$ 1.08 & \$ 1.14 & \$ 1.20 \\\hline \text { EPS } & \$ 1.67 & \$ 1.77 & \$ 1.80 & \$ 1.90 & \$ 2.00 \\\hline \text { ROE } & 7.00 \% & 7.00 \% & 7.00 \% & 7.00 \% & 7.00 \% \\\hline\end{array}$$ Market Information
90 Day T-bill Yield - 1.0%
Stock Market Risk Premium - 6.0%

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Definitions:

Generalization

A broader statement or principle derived from specific instances, making wider claims based on limited observations.

Generalization

A broad statement or concept derived from specific instances, often used to make predictions or assumptions about unobserved situations.

Plausible

Appearing likely or believable, though not necessarily true.

Method of Residues

A principle in problem-solving that identifies and subtracts known influences from a scenario to isolate unknown factors.