Chiptech, Incorporated, is an established computer chip firm with several profitable existing products as well as some promising new products in development. The company earned $2.80 a share last year, and just paid out a dividend of $1.26 per share. Investors believe the company plans to maintain its dividend payout ratio at 45%. ROE equals 24%. Everyone in the market expects this situation to persist indefinitely.

Required:

a. What is the market price of Chiptech stock? The required return for the computer chip industry is 20%, and the company has just gone ex-dividend (i.e., the next dividend will be paid a year from now, at t = 1).

Note: Do not round intermediate calculations. Round your answer to 2 decimal places.

b. Suppose you discover that Chiptechs competitor has developed a new chip that will eliminate Chiptechs current technological advantage in this market. This new product, which will be ready to come to the market in two years, will force Chiptech to reduce the prices of its chips starting in year 3 to remain competitive. This will decrease ROE in the third year and beyond to 20%. Anticipating the reduced profitability of new investments that will take hold beginning in year 3, the firm plows back a lower fraction of earnings starting at the end of the second year; therefore, the plowback ratio in year 2 and beyond will fall to 0.40. What is your estimate of Chiptechs intrinsic value per share? (Hint: Carefully prepare a table of Chiptechs earnings and dividends for each of the next three years. Pay close attention to the change in the payout ratio at the end of the second year.)

Note: Do not round intermediate calculations. Round your answers to 2 decimal places.

c. No one else in the market perceives the threat to Chiptechs market. In fact, you are confident that no one else will become aware of the change in Chiptechs competitive status until the competitor firm publicly announces its discovery near the end of year 2. What will be the rate of return on Chiptech stock in the coming year (i.e., between t = 0 and t = 1)? (Hint for parts c through e: Pay attention to when the market catches on to the new situation. A table of dividends and market prices over time might help.)

Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.

d. What will be the rate of return on Chiptech stock in the second year (between t = 1 and t = 2)?

Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.

e. What will be the rate of return on Chiptech stock in the third year (between t = 2 and t = 3)?

Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.

\begin{tabular}{|l|r|l|} \hline a. Market price of Chiptech stock & $21.03 & \\ \hline b. Estimate at time 2 & & \\ \hline b. Estimate at time 0 & & \\ \hline c. Rate of return & 15.00X & % \\ \hline d. Rate of return & 15.00X & % \\ \hline e. Rate of return & 15.00X & % \\ \hline \end{tabular}