Hey Chegg, I need help with this problem. I tried to solve it on my own, but I am confused in some areas. I was hoping you can take a look at my steps and show me what I need to correct.

There is a firm, which reinvests its profits back in itself. Consequently, it does not distribute any of its profit to the owners for the first 5 years. Afterward, it begins paying $6 per share for the sixth year. That rises by 200% for the 7^th year and by 100% for the 8^th. Beyond the 8^th year, it grows perpetually at a constant rate. Its dividend payout ratio is .6, its D/E is 50/50, its tax rate is .2, and its unlevered beta is 1. The net profit margin is .05. The asset turnover ratio is 2. The market premium is .04 and the risk free rate is .02. If the information for the last three sentences is applying to year 9, compute the price of the company.

A firm does not distribute any of its profit to the owners for the first 5 years

Afterwards, 6^th year dividend = $6 per share

7^th year dividend = $6 (1 + 200%)

7^th year dividend = $6 (1 + 2)

7^th year dividend = $6 (3) = $18 per share

8^th year dividend = $18 (1 + 100%)

8^th year dividend = $18 (1 + 1)

8^th year dividend = $18 (2) = $36 per share

9^th year dividend = ?

The data presented above includes:

Dividend Payout Ratio = .6

D/E = 50/50 = 1

Tax Rate (t) = .2

Unlevered Beta (B_Unlevered) = 1

Net Profit Margin = .05

Asset Turnover = 2

Market Risk Premium (R_M R_F) = .04

Risk Free Rate (R_F) = .02

Dividend Payout Ratio = Dividends / EPS

However, since the dividend payout ratio is already given, which is .6,:

EPS = $36 / .6 = $60

Net Profit Margin = EAT / Sales

However, since the net profit margin is already given, which is .05:

.05 = $60 / Sales

(Sales) *.05 = $60

Sales = $60 / .05

Sales = $1,200

Asset Turnover = Sales / Total Assets

However, since the asset turnover is already given, which is 2:

Total Assets = $1,200 / 2

Total Assets = $600

DuPont Equation:

ROE = (Net Profit Margin) (Asset Turnover) (Equity Multiplier or Financial Leverage)

ROE = (EAT / Sales) (Sales / Total Assets) (Total Assets / Equity)

Since net profit margin and asset turnover is given, financial leverage needs to be calculated: Debt/Equity = 50/50 = 1

Asset = Debt + Equity

Asset = 50 + 50 = 100

Total Assets / Equity = 100 / 50 = 2

Total Assets = $600, so Financial Leverage = Total Assets / Equity

Financial Leverage = $600 / ($600 * 50%)

Financial Leverage = $600 / ($600 * .50)

Financial Leverage = $600 / $300 = 2

ROE = (Net Profit Margin) (Asset Turnover) (Financial Leverage)

ROE = (.05) (2) (2)

ROE = .2 * 100 = 20%

g = (ROE) (RR)

However, retention ratio (RR) is not given so it needs to be calculated by using this equation: RR = 1 Dividend Payout Ratio

So, RR = 1 - .6

RR = .4

g = (.2) (.4)

g = .08 * 100 = 8%

b_Levered = b_Unlevered [1 + (1 t) D/E]

b_Levered = 1 [1 + (1 - .2) 50/50]

b_Levered = 1 [1 + (.8) 1]

b_Levered = 1 [1 + .8]

b_Levered = 1 [1.8]

b_Levered = 1.8

COE = Risk Free Rate + (Market Risk Premium) Levered Beta

COE = Risk Free Rate + (Return of the Market Risk Free Rate) Levered Beta

COE = R_F + (R_M R_F) B_Levered

COE = .02 + (.04) 1.8

COE = .02 + .072

COE = .092 * 100 = 9.2%

Price of the Company: Gordon Growth Model:

P_CS = D₈ (1 + g) / (COE g)

Here is where I am confused. I understand that financial leverage = total assets / equity. Total assets = $600 and D/E = 50/50 = 1. A friend of mine did it this way.

Asset = Debt + Equity

Asset = 50 + 50 = 100

Total Assets / Equity = 100 / 50 = 2. It doesn't make sense to me since total assets = $600, not 50

Another friend did it like this:

Financial Leverage = $600 / ($600 * 50%)

Financial Leverage = $600 / ($600 * .50)

Financial Leverage = $600 / $300 = 2, this doesn't make sense to me because how do we know 50 is a percentage and not an amount

Please tell me how to solve this and how to find the price of the company applying to year 9. I don't know what the dividend for year 9 is or what formula should I use to find the price of the company