Topic Valuation of Stock--minicase ch 7 Foundementals of Corporate Finance

What rate of return should be used--11% or 15%?

Table 7.6 Financial data for Prairie Home Stores, 2014-2018 (figure in millions)
	2014	2015	2016	2017	2018
book value, start of year	62	66.1	69	73.9	76.5
earnings	9.7	9.5	11.8	11	11.2
dividends	6.3	6.6	6.9	7.4	7.7
retained earnings	3.4	2.9	4.9	2.6	3.5
book value, end of year	66.1	69	73.9	76.5	80
[NOTE: 1) Prairie Home Stores has 400,000 common shares. 2) The company's policy is to pay cash dividends equal to 10% of start-of-year book value.
Table 7.7 Financial projections for Prairie Home Stores, 2019-2024 (figure in millions)
	2014	2015	2016	2017	2018
Rapid-Growth Scenario
book value, start of year	80	92	105.8	121.7	139.9	146.9
earnings	12	13.8	15.9	18.3	21	22
dividends	0	0	0	0	14	14.7
retained earnings	12	13.8	15.9	18.3	7	7.4
book value, end of year	92	105.8	121.7	139.9	146.9	154.3
Constant-Growth Scenario
book value, start of year	80	84	88.2	92.6	97.2	102.1
earnings	12	12.6	13.2	13.9	14.6	15.3
dividends	8	8.4	8.8	9.3	9.7	10.2
retained earnings	4	4.2	4.4	4.6	4.9	5.1
book value, end of year	84	88.2	92.6	97.2	102.1	107.2
1) Both Panels assume earnings equal to 15% of start-of-year book value. This profitability rate is consistent.
2) The top panel assumes all earnings are reinvested from 2019 to 2022. In 2023 and later yeaqrs, two-thirds of earnings are paid out as dividends and one-third invested.
3) The bottom panel assumes two-thirds of earnings are paid out as dividends in all years.
4) Columns may not add up because of rounding.