Question 2: Share Valuation A financial analyst is looking at a new tech company called Boom Video Communications Inc. that will incorporate AR technologies during virtual meetings. They have made the following annual forecasts for this stock: Year 1 2 3 4 EPS $2.50 $3.00 $2.30 $2.48 ROE 25% 25% 16% 16% Payout ratio 20% 20% 50% 50% DPS $0.50 $0.60 $ 1.15 $1.24 Growth rate of dividends 20% 92% 8% Suppose the required rate of return for Boom Video Communications Inc. is 12% p.a. 1) Calculate the value of Boom Video Communications Inc. if the long-run growth rate starting from Year 4 is assumed to be 8% p.a. 2) What is the present value of Boom Video Communications Inc. at Year 3? What part of this value reflects the present value of earnings under a no-growth policy? What proportion of the value reflects the present value of growth opportunities (PVGO) after Year 3? 3) Suppose that competition from Microsoft Corporation (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL) will catch up with Boom Video Communications Inc. by Year 4 so that it can only earn a ROE equal to its cost of capital (or required rate of return) on any investments made in Year 4 and afterwards. What is the stock now worth if they continue to plowback 50% of their EPS back into the company? What would the stock be worth instead if they decide to payout 100% of their EPS to their investors? Explain. Question 2: Share Valuation A financial analyst is looking at a new tech company called Boom Video Communications Inc. that will incorporate AR technologies during virtual meetings. They have made the following annual forecasts for this stock: Year 1 2 3 4 EPS $2.50 $3.00 $2.30 $2.48 ROE 25% 25% 16% 16% Payout ratio 20% 20% 50% 50% DPS $0.50 $0.60 $ 1.15 $1.24 Growth rate of dividends 20% 92% 8% Suppose the required rate of return for Boom Video Communications Inc. is 12% p.a. 1) Calculate the value of Boom Video Communications Inc. if the long-run growth rate starting from Year 4 is assumed to be 8% p.a. 2) What is the present value of Boom Video Communications Inc. at Year 3? What part of this value reflects the present value of earnings under a no-growth policy? What proportion of the value reflects the present value of growth opportunities (PVGO) after Year 3? 3) Suppose that competition from Microsoft Corporation (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL) will catch up with Boom Video Communications Inc. by Year 4 so that it can only earn a ROE equal to its cost of capital (or required rate of return) on any investments made in Year 4 and afterwards. What is the stock now worth if they continue to plowback 50% of their EPS back into the company? What would the stock be worth instead if they decide to payout 100% of their EPS to their investors? Explain