Penn Central Electricity has existing assets that generate $4 in earnings per share. If the firm...

Penn Central Electricity has existing assets that generate $4 in earnings per share. If the firm does not invest except to maintain existing assets, EPS is expected to remain constant at $4 a year. However, Penn Central can start next year with investing $1 per share a year in developing a newly discovered source for electricity generation. Each investment is expected to generate a permanent 25% return. However, the source will be fully developed by the fifth year of investing in it, which means that no more new investments are possible from year 6 onwards. Investors require an 18% rate of return.

A. What is the price-earnings (P/E) ratio?

B. What is the stock price if the firm would have had the same investment opportunity for 5 years, but now while maintaining a 75% dividend payout ratio during these five years?

C. What is the NPVGO if the firm has the investment opportunity in perpetuity maintaining a 25% retention ratio?

Notes: If possible, please provide the formulas and steps. Our class doesn't use a financial calculator either - only using time value of money math. Thank you!

Solutions

Expert Solution

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

A firm has basic earnings per share of $1.90. If the tax rate is 30%, which...

A firm has basic earnings per share of $1.90. If the tax rate is 30%, which of the following securities would be dilutive? (Circle the best answer.) a. Convertible 5% bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock. b. Convertible 6% bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock. c. Cumulative convertible 4%, $100 par, preferred stock, issued at par, with each preferred share convertible into...

Over the last 10? years, a firm has had the earnings per share shown in the...

Over the last 10? years, a firm has had the earnings per share shown in the following? table: . 2015 $1.50 2010 $3.55 2014 $3.01 2009 $1.76 2013 $3.73 2008 $1.76 2012 $2.93 2007 -$1.31 2011 $4.81 2006 $0.56 a.??If the? firm's dividend policy were based on a constant payout ratio of? 40% for all years with positive earnings and? 0% otherwise, what would be the annual dividend for 2015?? b.??If the firm had a dividend payout of? $1.00 per?...

Suppose Rocky Brands has earnings per share of $2.26 and EBITDAof $29.7 million. The firm...

Suppose Rocky Brands has earnings per share of $2.26 and EBITDA of $29.7 million. The firm also has 5.3 million shares outstanding and debt of $130 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 13.6 and an enterprise value to EBITDA multiple of 7.5, estimate the Enterprise Value of Rocky Brands by using both multiples. Which estimate...

Suppose Rocky Brands has earnings per share of $2.27 and EBITDA of $29.5 million. The firm...

Suppose Rocky Brands has earnings per share of $2.27 and EBITDA of $29.5 million. The firm also has 5.4 million shares outstanding and debt of $125 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 13.6 and an enterprise value to EBITDA multiple of 7.8, estimate the Enterprise Value of Rocky Brands by using both multiples. Which estimate...

Your company has earnings per share of $4. It has 1million shares outstanding, each of which...

Your company has earnings per share of $4. It has 1million shares outstanding, each of which has a price of $36. You are thinking of buying TargetCo, which has earnings per share of $1, 1million shares outstanding, and a price per share of $22. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents...

Your company has earnings per share of $4. It has 1 million shares outstanding, each of...

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $43. You are thinking of buying TargetCo, which has earnings per share of $3, 1 million shares outstanding, and a price per share of $21. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the...

Alternative dividend policies Over the last 10 years, a firm has had the earnings per share...

Alternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table: Year Earnings per Share Year Earnings per Share 2019 $1.50 2014 $2.19 2018 $3.93 2013 $1.18 2017 $3.76 2012 $1.18 2016 $3.99 2011 -$1.07 2015 $3.93 2010 $0.85 a. If the firm's dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend for...

Firm A Firm T Price per share $100.00 　 $20.00 Total earnings $650.00 　 $150.00 Share outstanding 100 　...

Firm A Firm T Price per share $100.00 　 $20.00 Total earnings $650.00 　 $150.00 Share outstanding 100 　 40 Total Value $10,000.00 　 800.00 Suppose Company A will acquire Company T. Company A will offer two new share of A for every five shares of T. a. If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger? _________ (sample answer: 27.50) b.Now suppose that the merger really does increase...

Julie's Market Place has earnings per share of $.35, a book value of $2.10 per share,...

Julie's Market Place has earnings per share of $.35, a book value of $2.10 per share, and a market-to-book ratio of 3. What is the firm's price-earnings ratio?

1/ A company has earnings per share of $9.40. Its dividend per share is $1.15, its...

1/ A company has earnings per share of $9.40. Its dividend per share is $1.15, its market price per share is $115.62, and its book value per share is $92. Its price-earnings ratio equals: Multiple Choice 9.40. 9.79. 8.17. 8.30. 12.30. 2/ A company issues 6%, 4-year bonds with a par value of $200,000 on January 1 at a price of $207,170, when the market rate of interest was 5%. The bonds pay interest semiannually. The amount of each semiannual...

Subjects