Details of this Paper

A company has the following balance sheet, $mm:

Description

solution


Question

IV) A company has the following balance sheet, $mm;Equipment 500 Equity 450;Cash 50 Debt 100;Actual and accounting depreciation are both 10%, which the company replaces. Taxes are 0%. ROE is 12% and there are 10 million shares outstanding.;The company is expected to exist for three years, during which it pays out all earnings as dividends at the end of each year. Then it sells its assets, pays its debts and returns whatever funds it has to shareholders. Using 3% as the risk-free rate and 2% as the risk premium, what is the price per share?;V) Same as IV, but assume actual depreciation is 20%. What is the price per share.;VI) Again as IV (not V), but the company?s financial managers pay out only half of earnings as dividends. The reminder is invested in new equipment which maintains the 12% ROE. What is the price per share?;VII) Again as IV (not V or VI). Inflation is 5% per year, which affects earnings (including the first year, i.e., the ROE assumption is before inflation) and the value of the equipment (depreciation is replaced, so can be ignored again) when it is sold. What is the price per share, recognizing the inflation premium in the discounting?;VIII) A company is not expected to close, not ever, never!!! It earns $5/share which is expected ad infinitum, and it pays it all out in dividends. The riskless interest rate, risk premium and expected inflation rate are as above. What is the price per share?

 

Paper#24411 | Written in 18-Jul-2015

Price : $37
SiteLock