What does the market believe the return on new investment

Assignment Help Financial Accounting

Reference no: EM132665791

ClapTrap is a rapidly growing image messaging company. The company's growth strategy requires rapid reinvestment currently, with dividend payouts increasing as growth opportunities gradually disappear. You have the following financial information:
Earnings in the most recently concluded fiscal year were $6.12. 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 42.0%.

The next year (from t=1 to t=2 ), the company will retain 87.0% of its earnings. Return on new investment is expected to be 32.0%. In the following year (from t=2 to t=3), the company will retain 70.0% of its earnings with an expected return on new investment of 20.0%.
The company will then enter a period of stable growth, retaining 49.0% of its earnings in perpetuity.

The expected dividends per share for t=1 is $1.129752.
The expected dividends per share for t=2 is $3.332942208
The expected dividends per share for t=3 is $6.459242

Problem 1: ClapTrap common stock currently trades at $63.5 per share, and you estimate the cost of equity to be 15.7%. Given your answers above, what does the market believe the return on new investment will be for ClapTrap when it reaches its stable growth perpetuity phase. (Round up to two decimal places)

Reference no: EM132665791

Questions Cloud

Identify data that suggests a problem exists : In this week's Discussion, you shared your experiences with health care practice problems as a consumer and/or as a practitioner. Now, consider your current.

Identify companies which make use of cost advantage approach : Identify two companies which make use of cost advantage approach (those which try to compete on costs) and discuss their mechanisms.

Goal of developing coping skills for your team : Design two activities for Phase 2 with the goal of developing coping skills for your team. This includes mental capacities to deal with isolation and develop

Security architecture and design : Diskus protect itself from such an attack? Should the business analytics system provide a method of authentication of valid agents in order to protect against

What does the market believe the return on new investment : What does the market believe the return on new investment will be for ClapTrap when it reaches its stable growth perpetuity phase.

Addressing issues related to end-of-life : Do you think our society could be doing a better job of addressing issues related to end-of-life and What ethical issues might be faced by a counselor working

What were some of more interesting assignments : What were some of the more interesting assignments to you? How has this course changed your perspective?

What is the value of a prescott pharmaceuticals share : According to the dividend-discount model, what is the value of a Prescott Pharmaceuticals share if the firm's equity cost of capital is 12.3%?

Explain the linear regression in brief : Review the Statistics and Data Analysis for Nursing Research chapters that you read as a part of the Week 7 Learning Resources. As you do so, pay close.

User Account

All Pages