Question 22 (cont'd) ii. In order to estimate the long-run sustainable growth rate of dividends later, compute for each of the five years from 2017 to 2021 (rounded to two decimal places) the following of the company, as well as their median values: a. Dividend payout ratio; b. Return on equity (ROE). [5 marks] iii. The analyst believes the following will happen in the long run: (1) the payout ratio will be maintained at a level equal to three times of the median payout ratio from part (ii.a), and (2) the ROE will stabilize at a level equal to half of the median ROE from part (ii.b). Based on this belief, a estimate the long-run sustainable growth rate of dividend using the approach discussed in the module (rounded to three decimal places); b. besides the constant payout ratio and constant ROE assumptions, what assumption is necessary for this estimation approach to work? [3 marks] iv. The analyst believes that from 2022 to 2025, the company will maintain a constant payout ratio equal to the median payout ratio from part (ii.a). a. Based on the dividend discount model (DDM), estimate the per-share equity value of the company at the fiscal year-end 2021. You should use regular dividend per share (DPS) forecasts that are consistent with the analyst's EPS forecasts. You should also assume that the analyst's belief, as given in part (iii), holds from 2026 onward; by implication, the regular DPS will grow at the long-run sustainable growth rate of dividend from part (iii.a). (Note: Regular DPS refers to the amount of DPS paid from the EPS based on the payout ratio.) b. Estimate again the per-share equity value of the company at the fiscal year-end 2021 if, in addition to the assumptions described so far about the regular DPS, there is a special DPS of $33.07 to be paid in 2025 as a one-off return of capital to common shareholders? [6 marks] v. As consistent with the assumptions for the regular and the special DPS and other information given so far, compute the following forecasts of the company (rounded to two decimal places) for each of the years in the periods below: a. EPS from 2026 to 2027; b. Book value of equity per share (BPS) and abnormal earnings per share (AEPS) from 2022 to 2027 c. ROE from 2026 to 2027; d. Growth rates of EPS, BPS, and AEPS for 2027. [7 marks] vi. As consistent with the assumptions for the regular and the special DPS and other information given so far, and the forecasts from part (v), estimate the per-share equity value of the company at the fiscal year-end 2021, using the residual income model (RIM). Explain the basis of your assumption for the growth rate of AEPS from 2027 onward and how that assumption is consistent with the other assumptions made. [8 marks] Question 22 (cont'd) ii. In order to estimate the long-run sustainable growth rate of dividends later, compute for each of the five years from 2017 to 2021 (rounded to two decimal places) the following of the company, as well as their median values: a. Dividend payout ratio; b. Return on equity (ROE). [5 marks] iii. The analyst believes the following will happen in the long run: (1) the payout ratio will be maintained at a level equal to three times of the median payout ratio from part (ii.a), and (2) the ROE will stabilize at a level equal to half of the median ROE from part (ii.b). Based on this belief, a estimate the long-run sustainable growth rate of dividend using the approach discussed in the module (rounded to three decimal places); b. besides the constant payout ratio and constant ROE assumptions, what assumption is necessary for this estimation approach to work? [3 marks] iv. The analyst believes that from 2022 to 2025, the company will maintain a constant payout ratio equal to the median payout ratio from part (ii.a). a. Based on the dividend discount model (DDM), estimate the per-share equity value of the company at the fiscal year-end 2021. You should use regular dividend per share (DPS) forecasts that are consistent with the analyst's EPS forecasts. You should also assume that the analyst's belief, as given in part (iii), holds from 2026 onward; by implication, the regular DPS will grow at the long-run sustainable growth rate of dividend from part (iii.a). (Note: Regular DPS refers to the amount of DPS paid from the EPS based on the payout ratio.) b. Estimate again the per-share equity value of the company at the fiscal year-end 2021 if, in addition to the assumptions described so far about the regular DPS, there is a special DPS of $33.07 to be paid in 2025 as a one-off return of capital to common shareholders? [6 marks] v. As consistent with the assumptions for the regular and the special DPS and other information given so far, compute the following forecasts of the company (rounded to two decimal places) for each of the years in the periods below: a. EPS from 2026 to 2027; b. Book value of equity per share (BPS) and abnormal earnings per share (AEPS) from 2022 to 2027 c. ROE from 2026 to 2027; d. Growth rates of EPS, BPS, and AEPS for 2027. [7 marks] vi. As consistent with the assumptions for the regular and the special DPS and other information given so far, and the forecasts from part (v), estimate the per-share equity value of the company at the fiscal year-end 2021, using the residual income model (RIM). Explain the basis of your assumption for the growth rate of AEPS from 2027 onward and how that assumption is consistent with the other assumptions made. [8 marks]
