You are considering an investment in the shares of Kirk\'s Information Inc. The
ID: 2745452 • Letter: Y
Question
You are considering an investment in the shares of Kirk's Information Inc. The company is still in its growth phase, so it won’t pay dividends for the next few years. Kirk’s accountant has determined that their first year's earnings per share (EPS) is expected to be $20. The company expects a return on equity (ROE) of 25% in each of the next 5 years but in the sixth year they expect to earn 20%. In the seventh year and forever into the future, they expect to earn 15%. Also, at the end of the sixth year and every year after that, they expect to pay dividends at a rate of 70% of earnings, retaining the other 30% in the company. Kirk's uses a discount rate of 15%.
Year
EPS
ROE
Expected Dividend
(end of year)
Present Value Of Dividend
(at time 0)
0
n/a
n/a
n/a
n/a
1
20
25%
0
0
2
25 = 1.25 x 20
25%
0
0
3
?
25%
0
0
4
?
25%
0
0
5
?
25%
0
0
6
?
20%
?
?
7
?
15%
?
?
8
?
15%
?
?
E. What is the value of the company now, at time 0?
is the value of the company now, at time 0?
Year
EPS
ROE
Expected Dividend
(end of year)
Present Value Of Dividend
(at time 0)
0
n/a
n/a
n/a
n/a
1
20
25%
0
0
2
25 = 1.25 x 20
25%
0
0
3
?
25%
0
0
4
?
25%
0
0
5
?
25%
0
0
6
?
20%
?
?
7
?
15%
?
?
8
?
15%
?
?
Explanation / Answer
Value of company at the end of year 8 (54.24316 / 15%) = 361.621
Value at year o = 53.19656 + (361.621 * 0.326902) = $171.41
Year EPS ROE Expected Dividend PVF PV of dividend 0 1 20 25% 0 0 0 2 25 25% 0 0 0 3 31.25 25% 0 0 0 4 39.0625 25% 0 0 0 5 48.82813 25% 0 0 0 6 58.59375 20% 41.01563 0.432328 17.73219 7 67.38281 15% 47.16797 0.375937 17.73219 8 77.49023 15% 54.24316 0.326902 17.73219 53.19656Related Questions
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