9.4 Youre considering buying shares of Kirks Information Inc. The company is still in a growth phase, so it wont pay dividends for the next few years. (10 marks)

Kirks accountant has determined that their first years earnings per share (EPS) is expected to be $20.

The company expects a return on equity (ROE) of 25% in each of the next five years but in year 6 they expect a ROE of 20%. In year 7 and beyond (indefinitely) it expects to earn a ROE of 15%. Assume that the required return on this investment is 15%.

Also, at the end year 6 and every year thereafter, the company expects to pay dividends at a rate of 70% of earnings, retaining the other 30% in the company.

1. Complete the following table (all values per share): (5 marks)

Year	Owners equity, beginning	EPS	ROE	Owners equity, ending	Expected dividend (end of year)
1	80	20	25%	100	0
2	100	100 x 0.25 = 25	25%	125	0
3	125		25%		0
4			25%		0
5			25%		0
6			20%
7			15%
8			15%

2. What would the dividend per share be at the end of year 8 (D₈, from your table above)? (1 mark)
3. Calculate the value of all future dividends for each share at the beginning of year 8. (Hint: P₇ depends on D₈.) (2 marks)
4. What is the present value of P₇ for a single share at the beginning of year 1 (i.e., now, at time 0)? (1 mark)
5. Recall that the value of a share is equal to the present value of all future dividends. What is the value of a single share in the company now, at time 0? (1 mark)