Consider Trying to Value a Company Called Etail

question 13

Multiple Choice

Consider trying to value a company called Etail.com on January 1.It pays dividends annually on Dec.31.Yesterday's dividend was $1.Dividends are expected to grow for the next 2 years at 10% and then settle down to a long-run growth rate of 5% in perpetuity.Because of the initial riskiness of the company,investors required a 20% rate of return over the first 2 years,but only a 12% rate of return thereafter.What is the fair price for the stock today,January 1?

• A) $13.76
• B) $36.77
• C) $14.36
• D) $12.75
• E) $14.96

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Definitions:

Voucher

A written document that serves as evidence of a transaction and authorizes payment.

Vouchers Payable

These are obligations or liabilities for goods and services received that are not yet paid for, usually validated by a voucher system.

Gross Method

An accounting practice where purchases are recorded at their full invoice price without deducting any purchase discounts taken.

Periodic Method

An accounting method where inventory purchases are recorded in a purchases account, with the inventory count and cost of goods sold calculated at the end of the accounting period.