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Question - You have been asked to value Dexia Financials, a small, high growth firm, and are told that Dexia generated £150 million in net income in the most recent year on a book value of equity of £750 million; the book value of assets is £5 billion right now and capital ratio is 15% (capital ratio=book value of equity/assets).
a. Dexia expects its assets and net income to grow 10% a year for the next five years and plans to increase its capital ratio to 20% of assets by the end of year 5 (with the ratio changing in equal annual increments over the five years). Estimate the free cash flows to the equity of Dexia each year for the next 5 years.
b. After year 5, Dexia expects to be a mature firm, growing 3% a year in perpetuity, while continuing to earn the return on equity that it had at the end of year 5. If the cost of equity for mature firm is 9%, estimate the value of equity at the end of year 5.
c. If Dexia expects to have a cost of equity of 12% for the next 5 years, estimate the value per share, assuming that Dexia has 50 million shares today.
Maintain a dividend payout ratio of 40%. If the firm's price-earnings ratio is 9.3 and its return on equity is 12%, what is its required rate of return?
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