Question
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.
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