Stephanie Works has recently regained control of her company, Peach, after sailing around the world for 5
Question:
Stephanie Works has recently regained control of her company, Peach, after sailing around the world for 5 years. In her absence, the company has changed significantly. Earnings growth is slow and the (now former) management team had decided to reassure investors by paying a large dividend. She is distressed to discover the most recent dividend (inconveniently paid yesterday) of $7.17 per share was 75% of earnings, (this ratio is called the payout ratio: Dividends per share = Payout Ratio x Earnings per share)
Earnings in a company are either paid out in dividends or are retained in the company to fund growth opportunities. Thus, overpaying dividends when positive NPV projects are available may destroy stockholder value. She has forecasted earnings growth and the payout ratios for two alternate paths for the Peach's future. 1) Continue down the conservative path with high dividends and low earnings growth 2) Cut dividends to $0, grow aggressively and initiate a more modest dividend in a few years. She has provided her forecasts in the attached file.
Use her growth projections to determine an earnings forecast for year 10 of each model.
| Current Projections | ||||||||||||
| Periods to discount | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Yrs | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 -> onward |
| Earnings growth | 5% | 5% | 5% | 5% | 3% | 3% | 3% | 3% | 3% | 3% | 2% | |
| Earnings | ||||||||||||
| Payout ratio | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% | 75% |
| Dividend | $7.17 | |||||||||||
| Future Stock Price | ||||||||||||
| PV Factor | ||||||||||||
| Value at t=0 | ||||||||||||
| Total PV_0 | ||||||||||||
| Cost of Equity Calculations (later look to CAPM model) | ||||||||||||
| ke | 7% | now on a "silver platter" | ||||||||||
| Stephanie's Proposal | ||||||||||||
| Periods to discount | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Yrs | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 -> onward |
| Earnings growth | 30% | 30% | 20% | 20% | 10% | 10% | 5% | 5% | 3% | 3% | 2% | |
| Earnings | ||||||||||||
| Payout ratio | 75% | 0% | 0% | 25% | 25% | 50% | 50% | 75% | 75% | 75% | 75% | 75% |
| Dividend | $7.17 | |||||||||||
| Future Stock Price | ||||||||||||
| PV Factor | ||||||||||||
| Value at t=0 | ||||||||||||
| Total PV_0 | ||||||||||||
| Cost of Equity Calculations (later look to CAPM model) | ||||||||||||
| ke | 9% | now on a "silver platter" | ||||||||||
| A bit higher to reflect riskier investment plans. |
Expert Answer:
Okay here are the steps to solve this problem 1 Calculate the Earnings in Year 10 for the Conserva... View the full answer
Managing Business Ethics Making Ethical Decisions
ISBN: 9781506388595
1st Edition
Authors: Alfred A. Marcus, Timothy J. Hargrave
