The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $6.30, all of which was reinvested in the company. The firm's expected ROE for the next four years is 20% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm's ROE on new investments is expected to fall to 19% per year. GG's market capitalization rate is 19% per year. a. What is your estimate of GG's intrinsic value per share? (Round your answer to 2 decimal places.) GG's intrinsic value b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? Price should at a rate of % over the next year.
Q: The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the…
A: a. The calculation of the intrinsic value per share is as follows: Hence, the intrinsic value per…
Q: Rome Corporation invests in the research and development department and will not pay dividends for…
A: PV=FV/(1+i)n, which divides the future value FV by a factor of 1 + I for each interval between the…
Q: The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the…
A: All is reinvested in the company so,
Q: Hors d'Age Cheeseworks has been paying a regular cash dividend of $4.5 per share each year for more…
A: Corporations issue stock in the financial markets for the objective and goal of acquiring equity…
Q: a) Newdeal Inc. follows a policy of distributing 45% of its profits and investing the rest in the…
A: Intrinsic Value of stock = [ Expected dividend after 1 year / ( Required rate - Growth rate ) ]…
Q: To retain high-performing engineers, a large semiconductor company provides corporate stock as part…
A: Present value analysis The present value is calculated by summing up the present value of all…
Q: Hors d'Age Cheeseworks has been paying a regular cash dividend of $12 per share each year for more…
A: Cash dividend means the amount of dividend which is declared by the firm to the shareholders in the…
Q: The Neal Company wants to estimate next year's return on equity (ROE) under different financial…
A: Expected return= R1P1+ R2P2….+ RnPn Where , R= expected return on that scenario P= probability of…
Q: Carla Vista Corp. has been selling electrical supplies for the past 20 years. The company’s product…
A: The portion of the earnings that are distributed among the common shareholders is termed as the…
Q: Oriole Corp. has been selling electrical supplies for the past 20 years. The company’s product line…
A: Given information in question: Dividend = $4.55 Required return…
Q: Hors d'Age Cheeseworks has been paying a regular cash dividend of $5.04 per share each year for over…
A: The share price is the current value of the share that helps in the buying and selling of the…
Q: FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity…
A: A corporation's capital structure refers to the precise mix of debt and equity it employs to fund…
Q: Utech Inc. is a startup company which must reinvest in itself heavily in the near future.…
A: Value of the stock refers to the intrinsic price of a stock. Intrinsic price of stock helps an…
Q: General Importers announced that it will pay a dividend of $2.00 per share one year from today.…
A: The current price of a stock is calculated by discounting all the future dividends at the present…
Q: Your current shareholder equity is $483,500, and your long-term debt is $324,670. Last year, you…
A: Return on invested capital (ROIC): Return on invested capital (ROIC) is a computation utilized to…
Q: Simpkins Corporation does not pay any dividends because it is expandingrapidly and needs to retain…
A: Given: D3 = $0.50 Growth rate for Year 4 and Year 5 is 80%. Followed by a constant growth rate (g)…
Q: The Neal Company wants to estimate next year's return on equity (ROE) under different financial…
A: ROE (Return on equity) shows the expected income on the capital employed by the business.
Q: The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the…
A: Intrinsic Stock Price is determined by computing present value(PV) of all future benefits that will…
Q: Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over…
A: Dividend in year 14 (D14) = $ 14 Growth rate after 14 years (g) = 4% Required return (r) = 9% Period…
Q: Last year, Marly Brown, Inc. reported an ROE of 25 percent. The firm’s debt-to-equity was 1.5 times,…
A: Internal growth rate refers to the maximum growth rate a company can achieve without any external…
Q: How should Heron Corporation distribute the $600,000 over the four-year period to provide the least…
A: Given information is: Your client, Heron Corporation, has a deficit in accumulated E & P of…
Q: Cheeko Limited is a company in Pakistan that focuses on producing pet products, it currently has 10…
A: Solution- Given that Cash Flow=PKR 10 million 3 million 15 million 6 million Growth rate=7% WACC=12%…
Q: a. What is the current value of the company? (Do not round intermediate calculations and round…
A: Value of Firm: It is the value of creditors' and shareholders' claims altogether. NOTE: As per…
Q: Metallic Bearings is a young start-up company. The firm plans to pay the following dividends - $9 in…
A: Computation:
Q: Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over…
A: given, D10=$10r=14%g=5%
Q: Minion, Inc., has no debt outstanding and a total market value of $332,100. Earnings before interest…
A: Return on Equity=Net IncomeEquity×100
Q: Hors d'Age Cheeseworks has been paying a regular cash dividend of $5.04 per share each year for over…
A: Given:
Q: Cheeko Limited is a company in Pakistan that focuses on producing pet products, it currently has 10…
A: Solution- (a)- Estimate share Price = [Firm's total value Today - Debt and preferred Stock] / Number…
Q: The management of Peerless Fabrics Inc. is considering a change in its capital structure. Currently,…
A:
Q: Cheeko Limited is a company in Pakistan that focuses on producing pet products, it currently has 10…
A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…
Q: The Emco Steel Company has experienced a slow (3 percent per year) but steady increase in earnings…
A: Introduction: Dividend policy of the company is characterised as a financial strategy for…
Q: a) Newdeal Inc. follows a policy of distributing 45% of its profits and investing the rest in the…
A: Growth rate = Retention ratio * Average Profitability Intrinsic Value = Expected Dividend / (…
Q: Newdeal Inc. follows a policy of distributing 45% of its profits and investing the rest in the…
A: Dividend Payout Ratio = 45% Retention Ratio = 1- Dividend Payout Ratio = 1-45% = 55% ROE = 20%…
Q: The management of Peerless Fabrics Inc. is considering a change in its capital structure. Currently,…
A: Hello. Since your question has multiple sub-parts, we will solve the first three sub-parts for you.…
Q: Packaging's ROE last year was only 4%, but its management has developed a new operating plan that…
A:
Q: Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain…
A: Working note:
Q: a) Newdeal Inc. follows a policy of distributing 45% of its profits and investing the rest in the…
A: Growth rate is calculated by the product of average profitability and the retention ration. Growth…
Q: Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings, hence…
A: Formulas:
Q: Cheeko Limited is a company in Pakistan that focuses on producing pet products, it currently has 10…
A: Terminal value is the value of firm or an asset beyond the predicted period. Terminal value concept…
Q: Hors d'Age Cheeseworks has been paying a regular cash dividend of $5.5 per share each year for more…
A: A) If we ignore the tax, And assume that the repurchase program conveys no information about the…
Q: AZ Products is looking into buying a computer for $218,000, it will be depreciated straight-line to…
A: Net present value (NPV) is a method that can be used to assess financial viability of a product. NPV…
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
- RESIDUAL DIVIDEND MODEL Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a 3.00 dividend per share (DPS) for the past several years, and its shareholders expeet the dividend to remain constant for the next several years. The companys target capital structure is 60% equity and 40% debt, it has 1,000,000 shares of common equity outstanding, and its net Income is 8 million. The company forecasts that it will require 10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? b. If Buena Terra follows the residual dividend model, what will be the companys dividend per share and payout ratio for the upcoming year? c. If Buena Terra maintains its current 3.00 DPS for next year, how much retained earnings will be available for the firms capital budget? d. Can the company maintain its current capital structure, the 3.00 DPS, and a 10 million capital budget without having to raise new common stock? e. Suppose that Buena Terras management is firmly opposed to cutting the dividend; that is, it wants to maintain the 3.00 dividend for the next year. Also, assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the companys capital budget Assume that the resulting change in capital structure has a minimal effect on the companys composite cost of capital so that the capital budget remains at 10 million. What portion of this years capital budget would have to be financed with debt? f. Suppose once again that Buena Terras management wants to maintain the 3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity and 40% debt) and its 10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue to meet each of its objectives? g. Now consider the case where Buena Terras management wants to maintain the 3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget to meet its other objectives. Assuming that the companys projects are divisible, what will be the companys capital budget for the next year? h. What actions can a firm that follows the residual dividend model take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget?RESIDUAL DIVIDEND MODEL Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a 3.00 dividend per share (DPS) for the past several years, and its, shareholders expect the dividend to remain constant for the next several years. The Companys target capital structure is 60% equity and 40% debt, it has 1,000,000 shares of common equity outstanding, and its net income is 8 million. The company forecasts that it will require 10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? b. If Buena Terra follows the residual dividend model, what will be the companys dividend per share and payout ratio for the upcoming year? c. If Buena Terra maintains its current 3.00 DPS for next year, how much retained earnings will be available for the firm's capital budget? d. Can the company maintain its current capital structure, the 3.00 DPS, and a 10 million Capital budget without having to raise new common stock? e. Suppose that Buena Terra's management is firmly opposed to cutting the dividend; that is, it wants to maintain the 3.00 dividend for the next year. Also, assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the companys capital budget. Assume that the resulting change in capital structure has a minimal effect on the company's composite cost of capital so that the capital budget remains at 10 million. What portion of this year's capital budget would have to be financed with debt? f. Suppose once again that Buena Terras management wants to maintain the 3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity and 40% debt) and its 10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue to meet each of its objectives? g. Now consider the case where Buena Terra's management wants to maintain the 3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget to meet its other objectives. Assuming that the company's projects are divisible, what will be the company's capital budget for the next year? h. What actions can a firm that follows the residual dividend model take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget?RESIDUAL DIVIDEND MODEL Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a 3.00 dividend per share (DPS) for the past several years, and its, shareholders expect the dividend to remain constant for the next several years. The Companys target capital structure is 60% equity and 40% debt, it has 1,000,000 shares of common equity outstanding, and its net income is 8 million. The company forecasts that it will require 10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? b. If Buena Terra follows the residual dividend model, what will be the companys dividend per share and payout ratio for the upcoming year? c. If Buena Terra maintains its current 3.00 DPS for next year, how much retained earnings will be available for the firm's capital budget? d. Can the company maintain its current capital structure, the 3.00 DPS, and a 10 million Capital budget without having to raise new common stock? e. Suppose that Buena Terra's management is firmly opposed to cutting the dividend; that is, it wants to maintain the 3.00 dividend for the next year. Also, assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the companys capital budget. Assume that the resulting change in capital structure has a minimal effect on the company's composite cost of capital so that the capital budget remains at 10 million. What portion of this year's capital budget would have to be financed with debt? f. Suppose once again that Buena Terras management wants to maintain the 3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity and 40% debt) and its 10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue to meet each of its objectives? g. Now consider the case where Buena Terra's management wants to maintain the 3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget to meet its other objectives. Assuming that the company's projects are divisible, what will be the company's capital budget for the next year? h. What actions can a firm that follows the residual dividend model take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget?
- ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of 0.75 out of annual earnings per share of 2.25. Currently, Rubenstein Bros.' stock is selling for 12.50 per share. Adhering to the company's target capital structure, the firm has 10 million in total invested capital, of which 40% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future. a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate ROE.) b. What is the stock's required return? c. If the firm changed its dividend policy and paid an annual dividend of 1.50 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must be the firms new expected long-run growth rate and required return? d. Suppose instead that the firm has decided to proceed with its original plan of dis bursing 0.75 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of 12.50. In other words, for every 12.50 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalist ion? (Hint. Remember that market capitalization = P0 number of shares outstanding.) e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how much will the companys earnings per share be diluted?ALTERNATIVE DIVIDEND POLICIES In 2017, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2017 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2018, earnings are expected to jump to 14.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It Ls predicted that Keenan will not be able to maintain the 2018 level of earnings growth because the high 2018 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2018, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2018 assuming that it follows each of the following policies: 1. Its 2018 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2017 dividend payout ratio. 3. It uses a pure residual dividend policy (40% of the 8.4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2018 and to have the dividend grow at 10% after 2018. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g - Retention rate ROE = (1.0 Payout rate)(ROE)] e. Does a 2018 dividend of 9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.ALTERNATIVE DIVIDEND POLICIES In 2013, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2013 was a normal year and that tor the past 10 years, earnings have grown at a constant rate of 10%. However, in 2014, earnings are expected to jump to 10.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It is predicted that Keenan will not be able to maintain the 2014 level of comings growth because the high 2014 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2014, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenan s total dividends for 2014 assuming that it follows each of the following policies: 1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2013 dividend payout ratio. 3. It uses a pure residual dividend policy (40% of the 8.4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify you answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2014 and to have the dividend grow at 10% after 2014. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE (1.0 Payout rate (ROE).] e. Does a 2014 dividend of 9,000,000 seem, reasonable in view of your answers to Parte c and d? If not, should the dividend be higher or lower? Explain your answer.