What does the market believe the return on new investment

Assignment Help Financial Accounting

Reference no: EM132804593

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: EM132804593

Questions Cloud

What is the initial value of company debt : Assume that Company is all equity financed. What is the value of equity? Now suppose Company has zero-coupon debt with a $100 million face value due next year.

What is the book value per share for? underwood : What price would you expect Underwood Motors shares to sell? for? What is the book value per share for? Underwood's shares?

What is the? firm equity? multiplier : Garwryk, Inc., which is financed with debt and? equity, presently has a debt ratio of 81 percent.

What is the risk posture for each particular system : Faced with the need to deliver risk ratings for your organization, you will have to substitute the organization's risk preferences for your own.

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.

Determine the Hoover days in inventory : The following information was available for Hoover Company at December 31, 2017: beginning inventory $110,000; Determine the Hoover days in inventory

Calculate the amount of the annual instalments : The bank requires equal annual instalments to repay both the interest and the principal. Calculate the amount of the annual instalments.

What can a poor security architect do : Given multivariate, multidimensional events generated by adaptive human agents, perhaps it would not be too far a stretch to claim that no two events.

Describe common-size financial statements : Please address one of the following topics. Please keep your responses brief and productive.

User Account

All Pages