4. The Vesper Company is currently a rapidly growing company that pays no divide

Question

4. The Vesper Company is currently a rapidly growing company that pays no dividends as of yet. EPS for the current year (ie.. EPS.) was $3 per share. The ROE is currently 20% and the dividend payout ratio is currently 0%. The ROE and dividend payout ratio are both forecasted to be the constant over the next 3 years. a. What is the sustainable (DuPont) growth rate over the next 3 years? SHOW YOUR WORK.3 points) b. Using the earnings growth rate form part a., forecast the next 3 years of EPS values. SHOVw YOUR WORK. (3 points) Analysts forecast that the Vesper Company's earnings growth rate will converge to the long- term industry average growth rate of 55% per year for year 4 and into perpetuity. The Vesper Company is expected to start paying dividends in year 4; the dividend payout ratio is expected to be 25% in year 4 and all following years into perpetuity, thus earnings and dividends will grow at the same growth rate from year 4 and into perpetuity. What is the forecasted EPS for year 4? SHOW YOUR WORK. (3 points) c. d. What is the forecasted value for Dividends per Share for year 4? SHOW YOUR WORK.(3 points) The beta value for the Vesper Company stock is estimated to be 1.30 while the risk-free rate is 1% and the expected market risk premium is 10%. What is the Required Return for the Vesper Company stock? SHOW YOUR WORK. (3 points) e. f. What is the forecasted stock value per share at year 3? SHOW YOUR WORK. (3 points) Given all of the information above, what is the current value per share (intrinsic value) of the Vesper Company stock? SHOW YOUR WORK. (3 points g.

Explanation / Answer

4)a)Sustainable growth rate =Retention ratio×ROE=100×.20=20% over the next 3 years.

b)EPS for year 1=$3×1.2=$3.6

For year 2=$3.6×1.2=4.32

For year 3=$4.32×1.2=5.184

c)EPS in year 4=$5.184×1.055=5.47

d)Dividend per share for year 4=$5.47×.25=$1.37

e)Required return =Rf+Rm-Rf×beta=1+(10*1.3)=14%

f)Stock value at year 3=D4/Re=1.37/.14=9.78

g)Current value per share =$9.78/1.14^3=$6.60.

Thank you.

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