Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

PKG Labs is a leading pathology provider and its shares are listed on the Australian Stock Exchange. In the year just ended, PKG Labs net

PKG Labs is a leading pathology provider and its shares are listed on the Australian Stock Exchange. In the year just ended, PKG Labs net income was $15 million and the plowback ratio was 60%. To maintain its current growth, PKG Lab has decided to keep its plowback ratio constant for the next 4 years. PKG Labs net income is expected to grow at a rate of 8% for the next 4 years. After 4 years, PKG Lab will reduce its plowback ratio to a constant rate of 20% and the net income will grow at a sustainable rate of 3% thereafter. PKG Lab is currently traded at $15 per share and has a beta of 0.8. The number of shares outstanding is 10 million. The companys cost of unlevered cash flow is 8.5%, and the cost of equity based on the CAPM is 10%. The expected market risk premium is 11%.

c) If you have changed your forecast on the market risk premium to 10%, what is the revised expected return of investing in PKG Lab for the next year based on CAPM? (to two decimal places) (1 mark)

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

Step: 3

blur-text-image

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

Financial Accounting

Authors: Walter B. Meigs, A. N. Mosich, Robert F. Meigs

2nd Edition

0070412901, 978-0070412903

More Books

Students also viewed these Accounting questions