Reference no: EM132554789

Ligma Aubergine Soups has just paid an annual dividend of $2.16 one year from now. Analysist expect this dividend to grow at 13.1% per year until the end of year 18. Thereafter, growth will level off at 3.4% per year in perpetuity. To be explicit on timing, cash flows grow by 13.1% until t=18, the t=19 cash flow will be 3.4% bigger than that the t=18 cash flow, and then cash flows grow by 3.4% annually in perpetuity. The cost of equity capital for Ligma is currently 7.5% per annum.

Question 1: According to the dividend-discount model, which of the following is closest to the value today of a share of Ligma Aubergine Soups?

a. $182.29

b. $177.79

c. $169.40

d. $158.62

e. $166.03

Jurassic Bark is a rapidly-growing puppysitting service for "long-term" clients. After a recent success with a trial client, Seymour, the firm believes itself ready for rapid expansion, replying on reinvestment of much of the firm's profits in order to fuel growth. The firm returns some cash flows to shareholders through both dividend payouts and share repurchases, which will both increase at growth opportunities gradually disappear. You have the following financial information:

• Earnings in the most recently concluded fiscal year were $212.00 million. The company will retain all its earnings this year (from t=0 to t=1), reinvesting in new projects with a return on new investment of 43.4%
• The next year (from t=1 to t=2), the company will retain 81.7% of its earnings. Of the money not being retained, the firm will return $38.39 million to shareholders through share repurchases (i.e. at t=1). Return on new investment is expected to be 37.1%
• In the following year (from t=2 to t=3), the company will retain 57.3% of its earnings with an expected return on new investment of 29.6%. The firm will pay out $76.12 million of cash through share repurchases at t=2
• The company will then retain 40.9% of its earnings in perpetuity. The firm will pay out $109.53 million through share repurchases at t=3.
• The firm has 125.00 million ordinary shares outstanding today.