ZQ Limited has earnings of CNY 10 million and is projected to growat a constant

Question

ZQ Limited has earnings of CNY 10 million and is projected to growat a constant rate of 5 percent forever because of the benifitsgained from the learning curve. currently all earnings are paid outas dividends. The company plans to launch a new project two yearsfrom now that would be completely internally funded and require 20percent of the earning that year. The project would startgenerating revenues one year after the launch of the project, andthe earnings from the new project in any year are estimated to beconstant at CNY 5 million. The company has 10 million shares ofstock outstanding. estimate the value of ZQ limited stock. Thediscount rate is 10percent
detailed answer would be nice
detailed answer would be nice

Explanation / Answer

Contsnat growth rate g = 5% Discount rate Ks = 10% New projct will start giving earning one year after launch ieFrom Year 3 onwards. So Earnings in that year = 10m * (1+g)^3 as Earnings areincreasing at 5% pa ie Earnings in Y3 = 10m*(1+5%)^3 = CNY 11.6m Add to this Earning of CNY 5m from new project. So total earning in Y3 = 11.6m + 5m = 16.6m
SO D3 = Earnings in Y3 paid as divideind/No of sharesoutstanding = 16.6m/10m = 1.66 per share So Price at Y2 = P2 = D2(1+g)/(Ks-g) = D3/(Ks-g) =1.66/(10%-5%) = 33.20 Dicounting this price to Preset value ie at Y0, we get P0 =P2/(1+Ks)^2 = 33.2/(1+10%)^2 = 24.44
SO estimated value of ZQ Ltd stock today is CNY24.44

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