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What is the equity price of the company

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Reference no: EM133109601

Assume that a company's earnings-per-share (EPS) are £2.50 in the current year (t=1), but that these are expected to grow at a 1% rate until time t=10. Starting from time t=11, the EPS remain constant at the level expected for time t=10. The company's payout ratio is 50%, and its discount rate is 8%. 

  1. What is the current (t=0) value of the growing stream of dividends (i.e., those from t=1 to t=10)?
  2. What is the current (t=0) value of the remaining cash flows (i.e., those from t=11 to infinity?
  3. What is the equity price of the company?
  4. Assume that this company has the option to invest into an investment project that would increase its growth rate to 2% over the first ten years. However, to invest in this project, the company needs to scale back its payout ratio to 25%. What would the company's equity price be if it accepted the investment project? 

Reference no: EM133109601

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