Question
Your task is to estimate equity value per share for Company C. - Earnings per share in year zero is $27.6. - Company C pays
Your task is to estimate equity value per share for Company C.
- Earnings per share in year zero is $27.6.
- Company C pays dividends once per year at the end of each year. The next dividend will be paid one year from today.
- Retention rates and returns on investment.
> In years 0 to 6, Company C is projected to reinvest 72% of its earnings back into the firm. The return on this investment is projected to be 14.2%.
> In years 7 to 11, the reinvestment rate is projected to be 45% and the return on reinvested earnings is projected to be 14%.
> Finally, in year 12 and in perpetuity, the reinvestment rate is projected to be 14% and the return on reinvested earnings is projected to be 12.1%.
> Use the retention rates and returns to estimate earnings growth rates for each following year (that is, the retention rate in year 0 flows through to earnings growth in year 1; the retention rate in year 1 flows through to earnings growth in year 2).
- The riskiness of Company C's cash flows justifies a discount rate on equity of 11.1%.
What is your estimate of equity value per share?
A: between $261 and $265
B: between $265 and $269
C: between $269 and $273
D: between $273 and $277
E: between $277 and $281
F: answer not in this range.
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