Provide an estimate of the firm value today

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Question - Sarah's Technologies has been growing quite rapidly in recent years, with earnings and dividends increasing at a rate of 30% per annum. This has been achieved by a relatively high level of retention in conjunction with high rates of return on investment. Retentions have been kept at a level of 60%. The company plans to continue with retentions at this level for another year, and then allow retentions to fall to 40% and 25% in the subsequent two years as good investment opportunities become more difficult to find. Earnings for the next year are expected to be $8,000,000. The expected rate of return on the investment to be undertaken next year is 30% and this is expected to fall to 25% the following year, and to 20% - which is the shareholder's required rate of return - the year after that.

Required -

a. Provide an estimate of the firm's value today.

b. Determine the rate of return the firm must have been earning to grow at 30% given the level of its retentions.

Reference no: EM132776059

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