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%.

a) What is the intrinsic value of the PKG Labs share price using the Dividend Discount Model? What is your investment advice based on the intrinsic value? (to two decimal places) (4 marks)