Problem Four: Valuation of Equity

Problem Four: Valuation of Equity
Assets and liabilities at the end of 2005 for Tripod Inc. are $4,970K and $2,220K respectively. Net income and dividends for fiscal 2005 were $ 500K and $200K, respectively. Tripod has 100 shares outstanding as of 12/31/05.
Net income is expected to grow at 10% for the next three years (2006 - 2008). The dividend payout ratio is expected to remain at 2005 level for next three years. After 2005 abnormal earnings are expected to be zero. Cost of debt is 8% and cost of equity is 15%.
What would you be prepared to pay per share for Tripod stock at the end of fiscal 2005, using the accounting based equity valuation formula?

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