AAS Inc. paid the last year dividend of 7 USD per share while EPS was 10 USD.
Question:
AAS Inc. paid the last year dividend of 7 USD per share while EPS was 10 USD. Return on equity was 25% and will be stable in the near future. Payout ratio is expected to increase linearly until it will level off at 80% in year 4. Financial department expects that return on equity will decrease to 15% starting from year 4. Risk-free rate is 10%. Return on the market portfolio is 20%. AAS has also attracted perpetual debt with annual interest payment of 1 USD per share at the beginning of this year to pay compensation for the lost lawsuit. Covariance between market index and AAS shares return is 10%, standard deviation of the market portfolio return is 25%. Corporate tax rate is 20%.
1. Determine intrinsic value of the stock.
2. Determine present value of growth opportunities and value of assets in place.
3. Is it possible for a firm to show positive free cash flows but be in trouble? Explain.
Managerial Economics
ISBN: 9781337106665
5th edition
Authors: Luke M. Froeb, Brian T. McCann, Michael R. Ward