Reference no: EM13937474
The common stock of PQR Inc. is expected to pay a dividend of $15 for each share exactly one year from now. Given the risk of the stock, the market requires a rate of return of 22%. The dividends are expected to grow in perpetuity at a constant rate of 10%.
(i) What is the “constant”-growth Gordon Growth Model intrinsic value of stock of the firm?
(ii) Assume that the firm has a stable plowback ratio of 39.5%. Assume that the retained earnings are used entirely for new investments and that assets in place are replaced in perpetuity by accumulated depreciation. The implied reinvestment return from plowback is 25.32%. What is the present value of earnings per share from the assets in place (value if there is no growth)? Using these figures, what is the Present Value of Growth Opportunities?
(iii) Prove using a forecast of future earnings, calculation of year-by-year NPV of plowback, and the standard PV arguments that this PVGO is correct.
(iv) Work out how the firm’s P/E ratio will change if from t=0 onwards the firm chooses to retain 5% instead of the current 39.5%, in the business.(v): Suppose appropriate discount rate for the firm’s stock rises to 30% (from 22% that we had earlier assumed). Explain qualitatively why the P/E does not rise when the firm increases the retention ratio.
(v) Suppose appropriate discount rate for the firm’s stock rises to 30% (from 22% that we had earlier assumed). Explain qualitatively why the P/E does not rise when the firm increases the retention ratio.
|
Equity valuation-constant-growth gordon growth model
: EQUITY VALUATION (10%) The common stock of PQR Inc. is expected to pay a dividend of $15 for each share exactly one year from now. Given the risk of the stock, the market requires a rate of return of 22%. What is the “constant”-growth Gordon Growth M..
|
|
Find the projects NPV-IRR and MIRR
: Assume you are the owner and operator of a textile manufacturer. You must evaluate the proposal of buying a new machine for your factory. The company has already spent $5,000 investigating the feasibility of using the machine. How should the $5,000 s..
|
|
What will be the firms cash cycle
: Assuming that all of LilyMac’s sales are on credit, what will be the firm’s cash cycle? (Use 365 days a year. Do not round intermediate calculations. Round your final answer to 2 decimal places.)
|
|
Assets equals the average duration of their liabilities
: Jennifer McAfee recently received her university Master’s degree and has decided to enter the mortgage brokerage business. Rather than work for someone else, she has decided to open her own shop. IM Insurance wish to hedge themselves against interest..
|
|
Constant growth gordon growth model intrinsic value of stock
: The common stock of PQR Inc. is expected to pay a dividend of $15 for each share exactly one year from now. Given the risk of the stock, the market requires a rate of return of 22%. The dividends are expected to grow in perpetuity at a constant rate ..
|
|
Small property accounts with average premiums
: Insurer X insures a large number of small property accounts with average premiums of $1,000. The policies range from a low of $600 to a high of $1,400 premium. Insurer X wants to grow but is inhibited by statutory surplus requirements. As the re-insu..
|
|
Tried-true home repair is considering replacement of bobcat
: Tried and true home repair is considering replacement of its bobcat. The old Machine cost $150,000 and was depreciated using a 5 year straight line depreciation schedule. The machine has been in operation for three years. It could be sold for $30,000..
|
|
Lowest-combination of insurance and reinsurance
: Large contractor has a need for $100,000,000 of completed operations liability coverage. However, their liability insurance carrier cannot provide this limit of insurance without reinsurance. These re-insurer options are available to the underwriter...
|
|
Considering the purchase of new production machine
: Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. What are the annual after-tax cash flows a..
|