Question
Zz decides not to proceed with the recap and remains financed by the common stock with N = 10, 000 shares outstanding trading at $50
Zz decides not to proceed with the recap and remains financed by the common stock with N = 10, 000 shares outstanding trading at $50 per share and by $500K of the risk-free perpetual debt. It intends to embark on the following 3-year growth plan: it will invest the amount I (per share) of its EPS in years 1, 2, and 3. The after-tax return on equity (ROE) is constant at 20% forever and each investment pays forever. NOTE: Use the discount rate rp = 10%. Please keep 3 digits after decimal. 1) What are Zzs EPS and dividend in year 2 expressed in terms of I? 2) What are Zzs EPS and dividend in year 3 expressed in terms of I? 3) What are Zzs EPS and dividend in year 4 expressed in terms of I? 4) What is Zzs price, P, expressed in terms of I with this reinvestment policy? Do not forget to include D1 in your calculations and please keep 3 digits after the decimal. Also please remember that since this project does not change the financing you should discount new dividends using rE calculated in part 1. 5) What is the value of I yielding PVGO = $1.907 from such investment policy?
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