Question
Intercontinental Inc. is an outdoor furniture company that is planning to considerably grow over the coming years. Gaining very good reputation with its high-quality products,
Intercontinental Inc. is an outdoor furniture company that is planning to considerably grow over the coming years. Gaining very good reputation with its high-quality products, the company is projecting that it can grow at 10% over the coming 4 years and then the growth rate will decrease to 3% thereafter. Its earning per share (EPS) this year was $4 and the company's dividend pay-out ratio was 30%, that is its most recent dividends was $1.2.
In order to finance this growth, the company needs to invest in new machinery and working capital.The company is considering three financing options to finance this growth: Either to raise equity, get an amortising loan from its bank or issue a bond.
If the company chooses to raise equity, what would be the expected price/share given the projected growth rates and given that the expected return on the company's equity is 15% (assume the company uses the divided discount model).
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