Question
Zoom Inc. is developing a new product that allows workers to call their colleagues when playing water sports. Zoom needs to re-invest all its current
Zoom Inc. is developing a new product that allows workers to call their colleagues when playing water sports. Zoom needs to re-invest all its current earnings to develop this product and therefore will payout its first annual dividend of $15 only at the end of Year 5. During the five years following that, dividends are projected to grow at 16% p.a. until the patent on the new product expires, causing a drop in Zoom's ROE to 15% p.a. and a corresponding increase in the payout ratio to 60%. The beta of Zoom is expected to remain constant at 1.2 throughout the analysis; the expected return on the S&P500 market index is 12% p.a. and the Treasury bond rate is 2% p.a.
a. What is the rate of return for Zoom Inc. required by shareholders? (1 mark)
b. What is the total present value of the forecasted dividends for Zoom Inc. (that is, those paid until the patent expires)? (4 marks)
c. What is the dividend per share (DPS) projected to be paid out at the end of Year 10? (2 marks
d. What is the growth rate of Zoom Inc. after the patent on the new product expires? (2 marks)
e. What is Zoom's terminal value (at the end of year 10)? (4 marks)
f.What would be the fair value of Zoom Inc's stock? (3 marks
g. If the current market price of Zoom Inc. is $300, how would you justify the difference between the current price and the fair value obtained in part f. above? (4 marks)
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