Answer question #4

Valuing Stocks Your investment adviser has sent you three analyst re- ports for a young, growing company named Vegas Chips. Incorporated. These reports depict the company as spec- ulative, but each one poses different projections of the company's future growth rate in eamings and dividends. All three reports show that Vegas Chips eamed $1.20 per share in the year just ended. There is consensus that a fair rate of return to investors for this common stock is l 4%, and that management expects to consistently eam a 15% return on the book value of equity (ROE 15%) Assignment l. The analyst who produced report A makes the as sumption that Vegas Chips will remain a small, regional company that, although profitable, is not expected to grow. In this case, Vegas Chips management is expected to elect to pay out 100% of earnings as dividends. Based on this report, what model can you use to value a share of common stock in Vegas Chips? Using this model, what is the value? e analyst who produced report B makes the assump- tion that Vegas Chips will enter the national market and grow at a steady, constant rate. In this case, Vegas Chips' management is expected to elect to pay out