4. Testing Services Inc. is expected to have earnings of $6 per share this com- ing...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
4. Testing Services Inc. is expected to have earnings of $6 per share this com- ing year. It expects earning will grow at 15% for three years. The company projects that from the third year (time 3) earnings will plateau for a period of 11 years, as at that point the firm will maximize its earnings capacity. Fol- lowing this stagnation period the company will be terminated, as its unique patent which is the source of its revenues will expire, and it will no longer be profitable to run the company. It plans to regularly reinvest 60% of the earnings and pay the rest as dividends. In the very last period (time 14) all earnings will be devoted to paying costs associated with liquidation. Conse- quently no dividends will be paid. For simplicity, assume dividends are paid once a year and that the next dividend payment is exactly one year away (i.e., at time 1). Assume that investors required rate of return on equity is 10%. 4.a Value the stock. 4.b It turns out that one of Testing Services divisions can operate as a stand alone company, as its revenues do ot rely on the patent. For legal reasons that division will be able to operate independently only when the rest of Testing Services is liquidated. It is projected that this division's earnings at the year Testing services is liquidated will be 40% of Testing services's earnings. Furthermore, once operating as an independent company the division intends to payout 70% of earnings as dividends to shareholders indefinitely; first payment at the year Testing Services is liquidated. The board is trying to use the share price of Testing Service to estimate the constant growth rate of the division. The current share price of Testing services is $48.079. Is it possible to infer the divisions growth rate. If not explain why, otherwise compute the growth rate. 4. Testing Services Inc. is expected to have earnings of $6 per share this com- ing year. It expects earning will grow at 15% for three years. The company projects that from the third year (time 3) earnings will plateau for a period of 11 years, as at that point the firm will maximize its earnings capacity. Fol- lowing this stagnation period the company will be terminated, as its unique patent which is the source of its revenues will expire, and it will no longer be profitable to run the company. It plans to regularly reinvest 60% of the earnings and pay the rest as dividends. In the very last period (time 14) all earnings will be devoted to paying costs associated with liquidation. Conse- quently no dividends will be paid. For simplicity, assume dividends are paid once a year and that the next dividend payment is exactly one year away (i.e., at time 1). Assume that investors required rate of return on equity is 10%. 4.a Value the stock. 4.b It turns out that one of Testing Services divisions can operate as a stand alone company, as its revenues do ot rely on the patent. For legal reasons that division will be able to operate independently only when the rest of Testing Services is liquidated. It is projected that this division's earnings at the year Testing services is liquidated will be 40% of Testing services's earnings. Furthermore, once operating as an independent company the division intends to payout 70% of earnings as dividends to shareholders indefinitely; first payment at the year Testing Services is liquidated. The board is trying to use the share price of Testing Service to estimate the constant growth rate of the division. The current share price of Testing services is $48.079. Is it possible to infer the divisions growth rate. If not explain why, otherwise compute the growth rate.
Expert Answer:
Answer rating: 100% (QA)
a EPS coming year 6 Dividend EPS x Payout ratio 6 x 1 06 24 D1 24 D2 ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
A company is expected to have earnings of $3.55 per share next year, $4.16 in two years, and $5.34 in three years. The dividend payout ratio is expected to remain at 30% over the next three years....
-
Covan, Inc., is expected to have the following free cash flows: a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, what should...
-
A new project is expected to have an 8-year economic life. The project will have an initial cost of $100,000. Installation and shipping charges for the equipment are estimated at $10,000. The...
-
In Exercises simplify the ratio of factorials. (n + 1)! n!
-
The scheduled commuting time on the Long Island Railroad from Glen Cove to New York City is 65 minutes. Suppose that the actual commuting time is uniformly distributed between 64 and 74 minutes. What...
-
Let P(x) be the profit from producing (and selling) x units of goods. Match each question with the proper solution. A. What is the profit from producing 1000 units of goods? B. At what level of...
-
The dimensionless parameters for a ball released and falling from rest in a fluid are \[ \mathrm{C}_{\mathbf{D}}, \quad \frac{g t^{2}}{D}, \quad \frac{ho}{ho_{b}}, \quad \text { and } \quad \frac{V...
-
Multiple-product target profit A&Z Company sells products both domestically and internationally. Fixed costs totaled $5,000,000 last year. In an effort to increase its total sales volume, A&Z plans...
-
5) Find the derivative and simplify your answer: y = 2x x - 3x+1
-
The purpose of this assignment is to develop practical skills in using WHOIS for domain information gathering, an essential aspect of cybersecurity investigations. Students will identify and analyze...
-
Draw the product Et2Cu
-
Graph the first-degree inequalities in two unknowns in Problems 13-48. \(y>3 x-3\)
-
Sketch the graph of each equation in Problems 3-30. \(y=-3 x^{2}\)
-
Graph the lines, curves, or half-planes in Problems 1-12. \(y=-\frac{4}{5} x-3\)
-
First, sketch the region under the graph on the interval \([a, b]\) in Problems 53-55. Then approximate the area of each region for the given value of \(n\). Use the right endpoint of each rectangle...
-
Graph each sequence in Problems 35-42 in two dimensions. \(a_{n}=\frac{n^{2}}{2 n+1}\)
-
15. In a family of five children where there are no multiple births and only a boy or girl is possible at each birth and either is equally probable find the expected value for the number of girls.
-
If M = 7, s = 2, and X = 9.5, what is z?
-
Assume your beginning debt in Problem 2 is $100,000. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity...
-
If returns of S&P 500 stocks are normally distributed, what range of returns would you expect to see 95% of the time? Base your answer on Figures (1) and(2). Small Stocks 22.05 S&P 500 11.74...
-
Milton Industries expects free cash flows of $5 million each year. Miltons corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million,...
-
The materials which exhibit the same elastic properties in all directions are known as: (a) Homogeneous (b) Isotropic (c) Isentropic (d) Inelastic
-
In a reaction steam turbine, steam expands: (a) In nozzle only (b) In moving blades only (c) Partly in nozzle partly in blades (d) None of the above
-
In impulse turbines, pressure on the two sides of the moving blades: (a) Increases (b) Decreases (c) Remains same (d) None of the above
Study smarter with the SolutionInn App