Review the "Valuing Stocks" Mini-Case (pg. 179).Answer question #4 only.

number and Y ompted for nter them in ck Here to that gives company's in Business the annual rate in 'se the lat- pare with ficiently? P/E ratio estimate pending Mini-Case Valuing Stocks your investment adviser has sent you three analyst re- ports for a young, growing company named Vegas Chips, Incorporated. These reports depict the company as spec- ulative, but each one poses different projections of the company's future growth rate in earnings and dividends. All three reports show that Vegas Chips earned $1.20 per share in the year just ended. There is consensus that a fair rate of return to investors for this common stock is 14%, and that management expects to consistently earn a 15% retum on the book value of equity (ROE 15%). Assignment I. The analyst who produced report A makes the as- sumption that Vegas Chips will remain a small, regional company that, although profitable, is not expected to grow, In this case, Vegas Chips' management is expected to elect to pay out 100% of earnings as dividends. Based on this report, what model can you use to value a share of common stock in Vegas Chips? Using this model, what is the value? 2 The analyst who produced report B makes the assump- tion that Vegas Chips will enter the market and grow at a steady, constant Chips' management is expect?3 Chapter 5 | Valuing Stocks 40% of earnings as dividends. This analyst discloses 179 3. 4. news that this dividend has just been committed to current stockholders. Based on this report, what model can you use to value a share of common stock in Vegas Chips? Using this model, what is the value? The analyst who produced report C also makes the as- sumption that Vegas Chips will enter the national mar- ket but expects a high level of initial excitement for the product that is then followed by growth at a constant rate. Earnings and dividends are expected to grow at a rate of 50% over the next year, 20% for the following two years, and then revert back to a constant growth rate of 9% thereafter. This analyst also discloses that Vegas Chips' management has just announced the pay out of 40% of the recently reported earnings to current stockholders. Based on this report, what model can you use to value a share of common stock in Vegas Chips? Using this model, what is the value? Discuss the feature(s) that drive the differing valuations of Vegas Chips. What additional information do you need to garner confidence in the projections of each analyst report?