Avalon Games, Inc. Stock Valuation

Calculate the Value of Avalon Games Stock

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Question

Marc Juneau, equity analyst, has just been assigned the task of valuing Avalon Games, Inc. The company is expected to grow at 30 percent for the next two years. Beginning in the year 4, the growth rate is expected to reach seven percent and stabilize. The required return for this type of company in the non-electronic games sector is estimated at 13 percent. The dividend in year 1 is estimated at $3.00. Which of the following is closest to the value Juneau should calculate for the stock of Avalon Games?

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Explanations

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A. B. C. D.

A

The high "supernormal" growth in the first three years and the decrease in growth thereafter signals that we should use a combination of the multi-period and finite dividend growth models (DDM) to value the stock of Avalon Games.

Step 1:Determine the Dividend stream through year 4

Step 2:Calculate the value of the stock at the end of year 3 (using D4)

Step 3:Calculate the PV of each cash flow stream at ke= 13%, and sum the cash flows.Note:We suggest you clear the financial calculator memory registers before calculating the value.

Note: 1Future values are entered in a financial calculator as negatives to ensure that the PV result is positive. It does not mean that the cash flows are negative.

Also, your calculations may differ slightly due to rounding. Remember that the question asks you to select the closest answer.

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