WAW is an established company operating in a rapidly growing market. Itsearnings per share this year (at time 1) are expected to be $1.90. These
WAW is an established company operating in a rapidly growing market. Itsearnings per share this year (at time 1) are expected to be $1.90. These earningsare currently growing at 15% per year. After this year, this growth rate ofearnings is expected to continue for four more years (years 2, 3, 4, and 5). Tosupport the earnings growth, the firm will retain much of its earnings. At time 1and time 2, the firm expects to payout 10% of its earnings as dividends. Then,beginning at time 3, the payout ratio will increase to 20% of earnings and remainat this level through time 5. Beginning at time 6, it is expected that the payoutratio of the company will be 0.50. This payout ratio is expected to remainconstant forever. The time 6 earnings are expected to be 8% higher than theearnings at time 5. WAW expects this 8% growth rate of earnings to continueforever. Given its risk, the required rate of return for this company is 13% p.a.
a. What is the current value of a share of WAW stock?
b. What fraction of the current value of WAW can be attributed to the presentvalue of growth opportunities?
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