Please do your answers on an Excel spreadsheet, using one tab per question. The alternative is to use pen and paper and submit these as a PDF (but this is not ideal.)

3 Equity Assessment

1. Ricotta Ltd, a small listed cheese-making company had revenues last year of $7.5 million and total costs of $4.5 million. Ricotta has 2.1 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 4 percent per year on this existing business. Ricotta pays tax at 30 cents in the dollar. The dividend payout ratio is 30%.

Required:

1. If the appropriate discount rate is 10 percent per annum and all cash flows are received at years end, what is the price per share of Ricotta Ltds stock? ( 4 marks)
2. Ricotta Ltd has decided to start a new project. This project requires an immediate outlay of $35 million. In one year, another outlay of $30 million will be needed. In the second year from today and onward, earnings from the new project will be a steady $20 million (before tax) per year, maintained in perpetuity. What effect will undertaking this new project have on the price per share of Ricottas stock? Please calculate the new expected share price. ( 8 marks)
3. Briefly define and explain the NPVGO model and use your answers to (i) and (ii) in your explanation (3 marks)