Company A, today expects to earn $8.50 per share for each of the future operating periods...

Company A, today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firm makes no new investments and returns the earnings as dividends to the shareholders. However, the CEO has discovered an opportunity to retain and invest 20 percent of the earnings beginning three years from today. This opportunity to invest will continue for each period indefinitely. He expects to earn 10 percent on this new equity investment, the return beginning one year after each investment is made. The firm’s equity discount rate is 12 percent.

a. What is the price per share of Company A's stock without making the new investment?

b. If the new investment is expected to be made, per the preceding information, what would the price of the stock be now?

c. Suppose the company could increase the investment in the project by whatever amount it chose. What would the retention ratio need to be to make this project attractive?

Solutions

Expert Solution

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

High-tech company expects to earn $65 per share at the end of the year and intends...

High-tech company expects to earn $65 per share at the end of the year and intends to pay out $35 in dividends to shareholders. The company’s net income is 500 million and its common share equity is $2,000 million A) Compute the future growth rate. B) If the investors’ required rate of return for High-tech’s stock is 18 percent, estimate the company’s common stock value. C) High-tech’s finance director is considering a change in the dividend policy and continue with...

ENN Inc. expects to earn $2 per share in year 1. The company has a policy...

ENN Inc. expects to earn $2 per share in year 1. The company has a policy of retaining 60 percent of its earnings and investing them at a return (R) of 20 percent. Stockholders in EG expect a return (K) of 15 percent on the stock. What price should ENN’s stock sell for? What is the premium for growth and the PE ratio The company has just come up with a new highly profitable product. As a result it...

Sisters Corp. expects to earn $34 per share next year. The firm’s ROE is 10% and...

Sisters Corp. expects to earn $34 per share next year. The firm’s ROE is 10% and its plowback ratio is 40%. If the firm’s market capitalization rate is 8%, what is the present value of its growth opportunities?

Rump Electric Power Ltd expects to earn $20 per share this year and intends to pay...

Rump Electric Power Ltd expects to earn $20 per share this year and intends to pay out $8 per share in dividends to shareholders and retain $12 per share to invest in new projects with an expected return on equity of 20%. In the future, Rump Electric Power Ltd expects to retain the same dividend payout ratio, expects to earn 20% return on its equity invested in new projects, and will not be changing the number of ordinary shares outstanding....

Solarpower Systems expects to earn $2020 per share this year and intends to pay out $99...

Solarpower Systems expects to earn $2020 per share this year and intends to pay out $99 in dividends to shareholders (so,Upper D 0 equals $ 9D0=$9) and retain $1111 to invest in new projects with an expected return on equity of 1919%. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of 1919% on its equity invested in new projects, and will not be changing the number of shares of ordinary shares...

Solarpower Systems expects to earn $20 per share this year and intends to pay out $10...

Solarpower Systems expects to earn $20 per share this year and intends to pay out $10 in dividends to shareholders (so, Upper D 10 (D0=$10) and retain $10 to invest in new projects with an expected return on equity of 19%. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn a return of 19% on its equity invested in new projects, and will not be changing the number of shares of ordinary shares outstanding....

Sisters Corp. expects to earn $4 per share next year. The firm’s ROE is 15% and...

Sisters Corp. expects to earn $4 per share next year. The firm’s ROE is 15% and its plowback ratio is 60%. If the firm’s market capitalization rate is 10%. a. Calculate the price with the constant dividend growth model. (Do not round intermediate calculations.) b. Calculate the price with no growth. c. What is the present value of its growth opportunities? (Do not round intermediate calculations.)

C.H.Inc currently has no debt and expects to earn $10 million in net operating income each...

C.H.Inc currently has no debt and expects to earn $10 million in net operating income each year for the foreseeable future. The required return on assets for companies of this type is 12.5 percent, and the corporate tax rate is 40 percent. There are no taxes on dividends or interest at the personal level. Assume that the managers of this company are weighing two capital structure alteration proposals. Proposal 1: involves borrowing $20 million at an interest rate of 6...

1) weaver brothers expects to earn $3.50 per share and has expected dividend payout ratio of...

1) weaver brothers expects to earn $3.50 per share and has expected dividend payout ratio of 60% . it's expected constant dividend growth rate is 7% and its common stock currently sells for $30 per share. new stock can be sold to public at the current price, but floatation cost of 5% would be incurred. what would be the cost of equity from new common stock? 2) Sorensen systems inc, is expected to pay a dividend of $2.90 at year...

Your company expects to pay a dividend of $1 per share, $2.4 per share and $3...

Your company expects to pay a dividend of $1 per share, $2.4 per share and $3 per share over the next 3years. Thereafter, dividends are expected to grow at 15 % per annum from 2 years, then 10% definitely. If your cost of capital is 24%, what price will investors be willing to pay for a share of the stock today The company has paid a dividend of $300 per share, which is expected to grow at 15% per annum....

Subjects