question archive Problem: Income Approach (DDM) at Amsterdam Amsterdam Company is preparing a fairness opinion in response to an offer it has received to buy the company
Problem: Income Approach (DDM) at Amsterdam Amsterdam Company is preparing a fairness opinion in response to an offer it has received to buy the company
Subject:AccountingPrice: Bought3
Problem: Income Approach (DDM) at Amsterdam Amsterdam Company is preparing a fairness opinion in response to an offer it has received to buy the company. The following information was collected: High-Growth Stable-Growth Stage Stage Beta 1.2 1.0 Return on assets 15.0% 5.0% Payout ratio 25.0% 75.0% Debt ratio 0.50 0.60 Length 3 years Infinite EPS was CAD 4.50 in the previous year. The risk-free rate is 4.5% and the market risk premium is 5.5%. REQUIRED: 1. Estimate the intrinsic value of Amsterdam's shares using the 2-stage income approach (DDM). 2. What percentage of Amsterdam's intrinsic value is accounted for by its terminal value? Does this create any problems for the valuation?
