Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I have been given Total Earnings at End of Year Earnings, but not the # of shares. I know my PBR and my POR. I

I have been given Total Earnings at End of Year Earnings, but not the # of shares. I know my PBR and my POR.

I know my total dividends will be 6 million, but I don't know my dividends per share. I know I need to find Div1 in order to proceed. How would I find this?

Here is the problem for context:

You are considering acquiring a privately held company in the software industry. You have the following information: the company's earnings at the end of year 1 (i.e., t=1) will be $10 million. Up to and including year 7 (i.e., t=7), the company will reinvest (i.e., plow back) 40% of the earnings and paying out the rest as dividends (so total dividends at t=1 will be $6 million). Earnings are expected to grow 8% per year up to t=7 (i.e., gearly=8%). Right after t=7, the ROE of the firm will change. The company will continue to plow back 40% of earnings, but earnings growth will only be 2% per year in perpetuity, starting at t=8 (i.e., glate=2%). The company's cost of capital is r=7% per year. What is the value of the company at t=0? (Round your answer to the nearest dollar.) HINT: Earnings growth between t=7 and t=8 is not 2%. Earnings at t=8 depend on book equity at t=7, and on the new ROE.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations of Financial Management

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen

15th edition

77861612, 1259194078, 978-0077861612, 978-1259194078

More Books

Students also viewed these Finance questions

Question

4. Identify the supernatural aid in The Wizard of Oz.

Answered: 1 week ago