Question

In: Finance

St Lucia Green Ltd. is a company that makes eco-friendly products. It is expected that the...

St Lucia Green Ltd. is a company that makes eco-friendly products. It is expected that the company will achieve an EPS of AUD 10 next year. The company’s current payout ratio is 40%. The required rate of return is 17%. Its return on equity is 23%.

a) What is the share price of St Lucia Green Ltd. if it does not pursue a growth strategy?

b) Suppose St Lucia Green now has a plan to pursue a growth strategy. Calculate its share price.

c) What is the difference in share value between the no-growth strategy and the growth strategy that St Lucia Green implements?

d) What can you conclude about this difference in relation to its growth plan?

Solutions

Expert Solution

Part a) Share price using walter's model = [D + (r/Ke)*(E-D)]/Ke where Dividend (D) = EPS*Payout ratio = 10*40% = AUD 4; r=0.23; Ke = 0.17; EPS (E) = AUD 10

Share price = [4+(0.23/0.17)*(10-4)]/0.17 = [4+(1.352941*6)]/0.17 = (4+8.117646)/0.17 = 12.117646/0.17 = AUD 71.28

Part b)

Share price using gordon's model = [E*payout ratio]/[Ke-br] where Payout ratio = 0.4; r=0.23; Ke = 0.17; EPS (E) = AUD 10; b=retention ratio = 1-payout ratio = 1-0.4 = 0.6

Share price = [10*0.4]/[0.17-(0.6*0.23)] = 4/(0.17-0.138) = 4/0.032 = AUD 125

Part c) Differenc between share price between no growth stategy & growth stategy = AUD 125 - AUD 71.28 = AUD 53.72

Part d)

Under Gordon's model (Growth model) growth = b*r. For the profit to grow, company should make new investment and for making new investment the company should retain profits to fund it. The retention & investment alone does not ensure growth, how much return is generated on the retained money (r) is also important. Hence retention or investment & return on retention (r) creates growth (g) in profits.


Related Solutions

St Lucia Green Ltd. is a company that makes eco-friendly products. It is expected that the...
St Lucia Green Ltd. is a company that makes eco-friendly products. It is expected that the company will achieve an EPS of AUD 10 next year. The company’s current payout ratio is 40%. The required rate of return is 17%. Its return on equity is 23%. a) What is the share price of St Lucia Green Ltd. if it does not pursue a growth strategy? b) Suppose St Lucia Green now has a plan to pursue a growth strategy. Calculate...
Case One: Green Machine, Inc. Green Machine, Inc., a company devoted to producing eco-friendly household products,...
Case One: Green Machine, Inc. Green Machine, Inc., a company devoted to producing eco-friendly household products, is a wholly owned subsidiary of Colossal Corporation. Green Machine's most famous and best-selling product is the Eco-Widget—a handheld, solar-powered device that recharges a variety of electronics on the go, including cell phones, laptops, and tablets. Colossal Corporation has uncovered an incident of theft at Green Machine: Approximately one month ago, over 400 Eco-Widgets were stolen from Green Machine's Adelphi, Maryland warehouse. Shortly after...
Case One: Green Machine, Inc. Green Machine, Inc., a company devoted to producing eco-friendly household products,...
Case One: Green Machine, Inc. Green Machine, Inc., a company devoted to producing eco-friendly household products, is a wholly owned subsidiary of Colossal Corporation. Green Machine's most famous and best-selling product is the Eco-Widget—a handheld, solar-powered device that recharges a variety of electronics on the go, including cell phones, laptops, and tablets. Colossal Corporation has uncovered an incident of theft at Green Machine: Approximately one month ago, over 400 Eco-Widgets were stolen from Green Machine's Adelphi, Maryland warehouse. Shortly after...
Jim is the owner and managing director of Colours Ltd, a company selling eco-friendly paints in...
Jim is the owner and managing director of Colours Ltd, a company selling eco-friendly paints in Ireland. The company has ten stores around the country and is the dominant player in its marketplace. Bulldog Paints is an AIM listed UK company. It sells eco-friendly and premium paints, owning 120 stores and operating mainly in the competitive UK market. It has recentlyundertaken a policy of international expansion. Bulldog Paints has recently suggested merging the two companies. Under the terms of the...
A company that sells eco-friendly cleaning products is concerned that only 18.5% of people use such...
A company that sells eco-friendly cleaning products is concerned that only 18.5% of people use such products select their brand. A marketing director suggests that the company invest in new advertising and labeling to strengthen its green image. The company decides to do so in a test market so that the effectiveness of the marketing campaign may be evaluated. Based on data collected in the test market, the company constructed a 98% confidence interval for the proportion of all consumers...
CoolE Ltd. produces two types of air-conditioning divisions: Conventional and Eco-friendly. For many years the company...
CoolE Ltd. produces two types of air-conditioning divisions: Conventional and Eco-friendly. For many years the company has been profitable and has operated at full capacity. However, for the last two years, prices on all air conditioners have been reduced and selling expenses increased to meet competition and to keep the plant operating at capacity. The company is considering disposing of the Eco-friendly division since it has been consistently unprofitable over the last two years. The following results for the last...
How should we think about fair trade coffee and other attempts at eco-friendly products and services?...
How should we think about fair trade coffee and other attempts at eco-friendly products and services? Are they a benefit or a hazard to CSR and efforts toward sustainability ?
With U.S. consumers becoming more environ-mentally conscious, there has been an explo-sion of eco-friendly products on...
With U.S. consumers becoming more environ-mentally conscious, there has been an explo-sion of eco-friendly products on the market. One notable entry has been the gas-electric hybrid car. A large nonprofit environmental group would like to tar-get customers likely to purchase hybrid cars in the future with a message expressing the urgency to do so sooner rather than later. They understand that direct mailings are very effective in this regard, but staying true to their environmental concerns, they want to avoid...
Viewing As part of its eco-friendly campaign, a company has asked for your advice whether installing...
Viewing As part of its eco-friendly campaign, a company has asked for your advice whether installing a wind turbine will generate enough electricity to be cost effective. To produce enough electricity, the average wind speed needs to be least 12 mph. Based on historical data from the past 5 years, 41 days were randomly chosen and their wind speed measurements were written down. This resulted in an average wind speed of 15 mph with a standard error of 0.6872 mph....
In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made...
In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made logs that can be burned in fire places, fire pits in the backyard, and when camping. The logs are made from environmental friendly products like cardboard and clean wax and emit fewer greenhouse gases and less harsh chemicals. The logs come in three pound and five pound sizes. Green-logs are also available with citronella to ward off mosquitos. The Green-Logs have been well received....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT