Reference no: EM132504159
Your task is to estimate equity value per share for the fictional liquor store Big Rona.
- Earnings per share in year zero is $27.4.
- Big Rona pays dividends once per year at the end of each year. The next dividend will be paid one year from today.
- Retention rates and returns on investment.
> In years 0 to 6, Big Rona is projected to reinvest 72% of its earnings back into the firm. The return on this investment is projected to be 15.9%.
> In years 7 to 11, the reinvestment rate is projected to be 40% and the return on reinvested earnings is projected to be 13.1%.
> Finally, in year 12 and in perpetuity, the reinvestment rate is projected to be 10% and the return on reinvested earnings is projected to be 12.2%.
> Use the retention rates and returns to estimate earnings growth rates for each following year (that is, the retention rate in year 0 flows through to earnings growth in year 1; the retention rate in year 1 flows through to earnings growth in year 2).
- The riskiness of Big Rona's cash flows justifies a discount rate on equity of 11.5%.
What is your estimate of equity value per share?
A: between $270 and $274
B: between $274 and $278
C: between $278 and $282
D: between $282 and $286
E: between $286 and $290
F: My answer does not appear in this range.