FINANCE

1. Which rate of return should be used to discount the future dividends of Prairie Home Stores? Justify your answer

2. Calculate the sustainable growth rate based on both the rapid growth scenario and the constant growth scenario in Table 7.7

3. What is the value per share based on the constant growth scenario? Show your calculations.

4. What is the value per share based on the rapid growth scenario? Show your calculations

TABLE 7.7 Financial projections for Prairie Home Stores, 2027-2032 (figures in millions) 2027 2029 Book value, start of year Earnings Dividends Retained earnings Book value, end of year Book value, start of year Earnings Dividends Retained earnings Book value, end of year Notes: $80 12 0 12 92 $80 12 8 4 84 2028 $ 92.0 13.8 0 13.8 105.8 $84.0 12.6 8.4 4.2 88.2 2030 Rapid-Growth Scenario $121.7 18.3 0 18.3 139.9 Constant-Growth Scenario $105.8 15.9 0 15.9 121.7 $88.2 13.2 8.8 4.4 92.6 $92.6 13.9 9.3 4.6 97.2 2031 $139.9 21.0 14.0 7.0 146.9 $ 97.2 14.6 9.7 4.9 102.1 2032 $146.9 22.0 14.7 7.4 154.3 $102.1 15.3 10.2 1. Both panels assume earnings equal to 15% of start-of-year book value. This profitability rate is constant. 2. The top panel assumes all earnings are reinvested from 2027-2032. In 2031 and later years, two-thirds of earnings are paid out as dividends and one-third reinvested. 3. The bottom panel assumes two-thirds of earnings are paid out as dividends in all years. 4. Columns may not add up because of rounding. 5.1 107.2 TABLE 7.7 Financial projections for Prairie Home Stores, 2027-2032 (figures in millions) 2027 2029 Book value, start of year Earnings Dividends Retained earnings Book value, end of year Book value, start of year Earnings Dividends Retained earnings Book value, end of year Notes: $80 12 0 12 92 $80 12 8 4 84 2028 $ 92.0 13.8 0 13.8 105.8 $84.0 12.6 8.4 4.2 88.2 2030 Rapid-Growth Scenario $121.7 18.3 0 18.3 139.9 Constant-Growth Scenario $105.8 15.9 0 15.9 121.7 $88.2 13.2 8.8 4.4 92.6 $92.6 13.9 9.3 4.6 97.2 2031 $139.9 21.0 14.0 7.0 146.9 $ 97.2 14.6 9.7 4.9 102.1 2032 $146.9 22.0 14.7 7.4 154.3 $102.1 15.3 10.2 1. Both panels assume earnings equal to 15% of start-of-year book value. This profitability rate is constant. 2. The top panel assumes all earnings are reinvested from 2027-2032. In 2031 and later years, two-thirds of earnings are paid out as dividends and one-third reinvested. 3. The bottom panel assumes two-thirds of earnings are paid out as dividends in all years. 4. Columns may not add up because of rounding. 5.1 107.2