AltaVista is a firm with a target leverage ratio of 0.5 (i.e., D/E ratio = 0.5),...

 

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AltaVista is a firm with a target leverage ratio of 0.5 (i.e., D/E ratio = 0.5), and its current cost of debt after tax is 3%. The firm expects to have earnings this coming year of €10 per share (period 1). AltaVista plans to retain 50% of its earnings for the next 3 years. Afterwards, the firm expect to be in the steady growth phase, and therefore will retain 30% of its earnings every year. Each year retained earnings will be invested in new projects with a return on investment of 15% per year (RONI). Any earnings that are not retained will be paid out as dividends. Assume the number of equity shares outstanding of AltaVista remains constant and all earnings growth comes from the investment of retained earnings. a. What will be the dividend per share every year over the next 6 years (draw a timeline with your solution). b. If the firm's weighted average cost of capital is 11%, what price would you estimate for the stock of AltaVista? c. What will be the effect on the stock price, if the firm does not change its retention policy after period 3 (i.e., keep retaining 50% till the infinity)? AltaVista is a firm with a target leverage ratio of 0.5 (i.e., D/E ratio = 0.5), and its current cost of debt after tax is 3%. The firm expects to have earnings this coming year of €10 per share (period 1). AltaVista plans to retain 50% of its earnings for the next 3 years. Afterwards, the firm expect to be in the steady growth phase, and therefore will retain 30% of its earnings every year. Each year retained earnings will be invested in new projects with a return on investment of 15% per year (RONI). Any earnings that are not retained will be paid out as dividends. Assume the number of equity shares outstanding of AltaVista remains constant and all earnings growth comes from the investment of retained earnings. a. What will be the dividend per share every year over the next 6 years (draw a timeline with your solution). b. If the firm's weighted average cost of capital is 11%, what price would you estimate for the stock of AltaVista? c. What will be the effect on the stock price, if the firm does not change its retention policy after period 3 (i.e., keep retaining 50% till the infinity)?

Answer rating: 100% (QA)

Question 2 Dividend per year 1 3 4 S Share year Every year Re... View the full answer