Assume there are 2 companies similar in every aspect: Fast Runner (FR) and Steady Walker (SW). Their projected EPS for 2019 is 400. Both companies do not foresee any additional investment opportunities in the near future. Outstanding equity shares for each company is 2 million

Questions:

1. What is the ideal dividend payout ratio in 2020? [2%] Explain [3%]
2. Calculate the intrinsic value of the stocks, given the market capitalization rate is 15% [5%]
3. Near end of 2019, FR finds an interesting investment opportunity requiring a capital expenditure of 500 million, with a potential return of 15%. It plans to take the opportunity and finance it internally. FR also plans to have a plough-back ratio of 60% because of this investment. The investment is projected to have a sustainable impact to the companys growth. Calculate the expected new market price for FR [5%]
4. To see the potential higher market price FR, SW plans to copy FRs decision by reducing the dividend payout. Will the same dividend payout ratio generate the same stock price for SW? [3%] Explain [2%]
5. Explain the PVGO concept [1%]. What are the PVGOs for each company? [2%]