Gorilla, Inc., has recently launched a ramen/sushi fusion dish that has received an overwhelmingly positivereaction from the market. In response to this success, the company is reinvesting all of its earnings to fuelfurther expansion. This past year, the earnings per share stood at $10, and these are anticipated to increase by20% annually over the next five years. However, by the end of the fifth year, it's expected that competitors willintroduce similar products. Consequently, analysts forecast that Gorilla will then reduce its reinvestment rateand start distributing 60% of its earnings as dividends. Additionally, from that point onwards, the company'sgrowth rate is projected to decelerate to a stable 3% per annum. If Gorilla's equity cost of capital is 8%, what isthe value of a share today?Complete the table below. You can use an Excel spreadsheet and then copy and paste the sheet.Additionally, please provide detailed explanations beneath the table on how to determine the values ineach cell, using either equations or descriptive methods.YearEPS growth rateEPSDividend payout ratioDividendsExpected CF ofInvestorEquity cost of capitalValue of share012345678

Current year Earnings per share$10.00Growth rate for the next 5 years20.00%growth rate after 5…

Answered: Gorilla, Inc., has recently launched a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 22P

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V Energy Tech Ltd. has just had a very profitable year as rising energy costs have driven a rapid increase in sales of its solar power cells. The firm also developed a new process which has lowered its manufacturing costs significantly. V Energy Tech believes that this new process will give it a major advantage over its competitors, which it estimates will last for three years. It expects to enjoy high profits during this period, estimating profit growth over the next three years to be 18%, 16% and 13% respectively, before returning to constant industry growth pattern of 6% per year in year 4. V Energy Tech Ltd. has just paid a dividend of $2.50 per share and expects that the dividend will grow at the same rate as its profits. The firm’s cost of capital is 9%. What is the firm’s share price today (P0)? What is the expected share price next year (P1)? Calculate the dividend yield for year 2. Calculate the current capital gains yield (year 1).
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The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next eight years. The firms CFO anticipates additional earnings before interest, taxes, depreciation, and amortization (EBITDA) from cost savings equal to $220,000 for the first year of operation of the centre; over the next seven years, the firm estimates that this amount will grow at a rate of 6% per year. The system will require an initial investment of $600,000 that will be depreciated over an eight-year period using straight-line depreciation of $75,000 per year and a zero estimated salvage value. The firms tax rate is 35% and the cost of capital for the project is 12%. What is the projects annual free cash flow (FCF) in year 2? A. $169,250 B. $206,784 C. S 186,925 D. $177,830
A software company that installs systems for inventory control using RFID technology spent $600,000 per year for the past 3 years in developing their latest product. The company optimistically hopes to recover its investment in 5 years on a single contract beginning immediately (year 0). The company is negotiating a contract that will pay $250,000 now and a to-beagreed- upon annual increase of a constant amount each year through year 5. How much must the income increase (an arithmetic gradient) each year, if the company wants to realize a return of 15% per year?
Phil plc and Costas plc are identical firms except that Costas is more levered. Both companies will remain in business for one more year. The economy is has recently been expanding. According to consensus forecasts, the probability of the continuation of the current expansion is 60% for the next year, and the probability of a recession is 40%. If the expansion continues, each firm will generate profit before interest and taxes of £2 million. If a recession occurs, each firm will generate profit before interest and taxes of £800,000. Phil’s debt obligation requires the firm to pay £750,000 at the end of the year. Costas’s debt obligation requires the firm to pay £1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15 per cent. What is the market value of (i) Phil plc and (ii) Costas plc? a None of the above b (i) £1,321,739 and (ii) £1,153,435 c (i) £1,530,435 and (ii) £1,530,435 d (i) £1,321,739 and (ii) £1,321,739 e (i)…
Phil plc and Costas plc are identical firms except that Costas is more levered. Both companies will remain in business for one more year. The economy is has recently been expanding. According to consensus forecasts, the probability of the continuation of the current expansion is 60% for the next year, and the probability of a recession is 40%. If the expansion continues, each firm will generate profit before interest and taxes of £2 million. If a recession occurs, each firm will generate profit before interest and taxes of £800,000. Phil’s debt obligation requires the firm to pay £750,000 at the end of the year. Costas’s debt obligation requires the firm to pay £1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15 per cent. What is the market value of (i) Phil plc and (ii) Costas plc? a.None of the above b (i) £1,321,739 and (ii) £1,153,435 c (i) £1,530,435 and (ii) £1,530,435 d (i) £1,321,739 and (ii) £1,321,739 e (i)…
Oriole Corp. has been selling electrical supplies for the past 20 years. The company’s product line has changed very little in the past five years, and the company’s management does not expect to add any new items for the foreseeable future. Last year, the company paid a dividend of $4.55 to its common stockholders. The company is not expected to increase its dividends for the next several years. If your required rate of return for such firms is 15 percent, what is the current value of this company’s stock?
Hayward Enterprises, a successful imaging products firm, is considering expanding into the lucrative laser-engraved self-portrait business. It is expected that this new business will generate first-year revenues of $1.8 million. These revenues are expected to grow at 11 percent per year for the next 8 years. Year 1 incremental operating costs of this new business are expected to total $500,000 and to grow at 7 percent per year for the next 8 years. The firm’s marginal tax rate is 40 percent, but its average tax rate is only 35 percent. Depreciation expenses are expected to be $115,000 during year 1, $220,000 during year 2, and $120,000 during year 3. Capital outlays required at time 0 total $2.4 million, and another $500,000 will be required at the end of year 1. Net working capital investments of $40,000, $55,000, and $95,000 are expected at the end of years 1, 2, and 3 respectively. Calculate the expected net cash flows for year 3. Round your answer to the nearest dollar. $
Healthy Foods Inc is considering introducing a new line of dried flowers. The firm expects to be able to generate $ 4 million in revenues from this new line, each year for the next 10 years. Customers who come to buy the flowers often buy the firm’s traditional offerings (fresh fruit and baked goods) and it is anticipated that the revenues on these goods will increase from $ 14 million to $ 17 million as a consequence. The firm has a 40% pre-tax operating margin on all of its products. Assuming a 8-year life, a 10% cost of capital, a 40% tax rate and no salvage value or depreciation, what is the maximum that you would be willing to invest in this new product line?
Grandmother’s Chicken Restaurant is experiencing a boom in business. The owner expects to serve 80,000 meals this year. Although the kitchen is operating at 100 percent capacity, the dining room can handle 105,000 diners per year. Forecasted demand for the next five years is 90,000 meals for next year, followed by a 10,000-meal increase in each of the succeeding years. One alternative is to expand both the kitchen and the dining room now, bringing their capacities up to 130,000 meals per year. The initial investment would be $200,000, made at the end of this year(year 0). The average meal is priced at $10, and the before-tax profit margin is 20 percent. The 20 percent figure was arrived at by determining that, for each $10 meal, $8 covers variable costs and the remaining $2 goes to pretax profit. What are the pretax cash flows from this project for the next five years compared to those of the base case of doing nothing?

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