Question
ABC Technologies has been growing quite rapidly in recent years, with earnings and dividends increasing at a rate of 30% per annum. This has been
ABC Technologies has been growing quite rapidly in recent years, with earnings and dividends increasing at a rate of 30% per annum. This has been achieved by a relatively high level of retention in conjunction with high rates of return on investment. Retentions have been kept at a level of 60%. The company plans to continue with retentions at this level for another year, and then allow retentions to fall to 40% and 25% in the subsequent two years as good investment opportunities become more difficult to find. Earnings for the next year are expected to be $8,000,000. The expected rate of return on the investment to be undertaken next year is 30% and this is expected to fall to 25% the following year, and to 20% - which is the shareholder's required rate of return - the year after that.
Provide an estimate of the firm's value today.
Determine the rate of return the firm must have been earning to grow at 30% given the
level of its retentions.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started