Question 24

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%.

d) What is the P/E ratio at the end of the fourth year from now (at the beginning of year 5)? (to two decimal places) Which stage of industry lifecycle will PKG be in after 4 yearsSupport your explanation with relevant numbers. (3 marks)