Hey Chegg, I was hoping that you can help me with this problem. I keep trying to solve it on my own, but I am not sure if I am right or if my approach is correct. Please take a look at my solution and tell me if I am right or wrong. Tell me where I messed up and what to do differently in order to get the correct answer. It would help me a lot.

There is a firm, which reinvests its profits back in itself. Consequently, it does not distribute any of its profit to the owners for the first 5 years. Afterward, it begins paying 46 per share for the sixth year. That rises by 200% for the 7^th year and by 100% for the 8^th. Beyond the 8^th year, it grows perpetually at a constant rate. Its dividend payout ratio is .6, its D/E is 50/50, its tax rate is .2, and its unlevered beta is 1. The net profit margin is .05. The asset turnover ratio is 2. The market premium is .04 and the risk free rate is .02. If the information for the last three sentences is applying to year 9, compute the price of the company.

My steps:

A firm does not distribute any of its profit to the owners for the first 5 years

Afterwards, 6^th year dividend = $46 per share

7^th year dividend = $46 (1 + 200%)

7^th year dividend = $46 (1 + 2)

7^th year dividend = $46 (3) = $138

8^th year dividend = $138 (1 + 100%)

8^th year dividend = $138 (1 + 1)

8^th year dividend = $138 (2) = $276

The data presented above includes:

Dividend Payout Ratio = .6

D/E = 50/50 = 1

Tax Rate (t) = .2

Unlevered Beta (B_Unlevered) = 1

Net Profit Margin = .05

Asset Turnover = 2

Market Risk Premium (R_M R_F) = .04

Risk Free Rate (R_F) = .02

Dividend Payout Ratio = Dividends / EPS

However, since the dividend payout ratio is already given, which is .6,:

EPS = 276 / .6

EPS = $460

Net Profit Margin = EAT / Sales

However, since the net profit margin is already given, which is .05:

.05 = $460 / Sales

(Sales) *.05 = $460

Sales = $460 / .05

Sales = $9,200

Asset Turnover = Sales / Total Assets

However, since the asset turnover is already given, which is 2:

Total Assets = $9,200 / 2

Total Assets = $4,600

DuPont Equation:

ROE = (Net Profit Margin) (Asset Turnover) (Equity Multiplier or Financial Leverage)

ROE = (EAT / Sales) (Sales / Total Assets) (Total Assets / Equity)

Since net profit margin and asset turnover is given, financial leverage needs to be calculated

We know that Debt/Equity = 50/50 and Total Assets = $4,600, so Financial Leverage = Total Assets / Equity Financial Leverage = $4,600 / 50 = 92

ROE = (.05) (2) (92)

ROE = 9.2

I don't know if I am correct or if I messed up here. Please let me know.

Find growth (g), since beyond the 8^th year, it grows perpetually at a constant rate. I seem to be confused here:

g = (ROE) (RR)

However, retention ratio (RR) is not given so it needs to be calculated by using this equation: RR = 1 Dividend Payout Ratio

So, RR = 1 - .6

RR = .4

g = (9.2) (.4)

g = 3.68 * 100

g = 368%

Again, I don't know if ROE is 9.2. I could be wrong since I am getting 368%, which is too high.

B_Levered = B_Unlevered [1 + (1 t) D/E]

B_Levered = 1 [1 + (1 - .2) 50 /50]

B_Levered = 1 [1 + (.8) 1]

B_Levered = 1 [1 + .8]

B_Levered = 1 [1.8]

B_Levered = 1.8. I believe I am correct here.

Help me calculate COE = Risk Free Rate + (Market Risk Premium) Levered Beta and the price of the company applying to year 9

I apologize if it is too much, but I am lost and I just need help.