Zimnat Life pays no cash dividends currently and is not expected to for the next 5 years.
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Question:
- Zimnat Life pays no cash dividends currently and is not expected to for the next 5 years. Its latest EPS was $10, all of which was reinvested in the company. The firm’s expected ROE for the next 5 years is 20% per year, and during this time, it is expected to continue to reinvest all of its earnings. Starting 6 years from now the firm’s ROE on new investment is expected to fall to 15% and the company is expected to start paying out 40% of its earning in cash dividends, which it will continue to do forever after. Zimnat’s market capitalisation rate is 15% per year.
- Estimate the intrinsic value per share of the firm
- Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year and the year after?
- What effect would it have on your estimate of the intrinsic value if you expected Zimnat to pay out only 20% of earnings starting in year 6?
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