Question
Now you are analyzing two new companies, Cash Cow and Growth Prospects. Assume the required rate for each is 10.0% and that both could pay
Now you are analyzing two new companies, Cash Cow and Growth Prospects. Assume the required rate for each is 10.0% and that both could pay a $4 dividend in perpetuity. Use this information to answer the next 6 questions.
1. What is the intrinsic value of the stocks? Round to two decimal places.
2. Now suppose that Growth Prospects increases their plowback ratio from 0% to 60% because they have an opportunity to reinvest earnings and earn 16%. What is the new dividend that will be paid? Round to two decimal places.
3. What is the new growth rate (g) of Growth Prospects given a plowback ratio of 60%? Enter as a decimal and round to three decimal places.
4. Assuming Growth Prospects will continue to have these investment opportunities in perpetuity, what is the new intrinsic value of the stock?
5. What is the Present Value of Growth Opportunities (PVGO) of Growth Prospects?
6. To be more realistic, you decide to use a two stage dividend discount model. Imagine that Growth Prospects expect 9% growth for only the next 2 years, and then the growth will slow to a 3% rate. Assume the required rate is still 10% and that the most recent dividend was $2. What is the new intrinsic value of Growth Prospects? Round your answer to two decimal places.
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