(a) Pepperoni Ltd, a small processed food company had revenues last year of $4.5 million and total costs of $3 million. Pepperoni has 1.4 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year on this existing business. Pepperoni pays tax at 40 cents in the dollar. The dividend payout ratio is 50%. 3 3 Required: - (i) If the appropriate discount rate is 10 percent per annum, what is the price per share of Pepperoni Ltd's stock? - wa marks) - (ii) Pepperoni Ltd has decided to start a new project. This project requires an immediate outlay of $2.8 million. In one year, another outlay of $2.1 million will be needed. Earnings from the new project will be a steady $1.4 million (before tax) per year and the first of these will be received two years from today, maintained in perpetuity. What effect will undertaking this new project have on the price per share of Pepperoni's stock? Please calculate the new expected share price. [Note: you may assume that (8 marks) 3 (b) Crofter Ltd had total assets of $950,000 and equity of $290,000 at the beginning of the year. + At the end of the year, the company had total assets of $810,000. + During the year, the company sold no new equity. + Net income for the year was $140,000+ At the end of the year, Crofter Ltd paid total dividends of $120,000. + 3 Required (i) Please calculate Crofter's growth rate using start-of-year equity. (2 marks) - (ii) Please show how you get the same result if you base your calculation on the end-of- year equity figure (4 marks)