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1) On July 26, 2002, AOL-Time Warner stock closed at= $10.90, had next-year consensus earnings estimate of= $0.99 per share, forward P/E= 11, and 18.5% annual nominal earnings growth expected for the next five years. Suppose that AOL-Time Warner’s annual growth was expected to decrease to 10% during following five years and then settle down to average long-term growth of 4%. AOL-Time Warner’s 5-year growth consensus was about 1.5% higher than long-term nominal growth of earnings forecasted at that time for S&P 500 as a whole. Additionally, suppose that after ten years AOL-Time Warner was expected to start a 51% dividend payout. Value AOL-Time Warner share by discounting future dividends. Suppose a cost of equity of 12%. Interpret your results.

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