Dishwasher\'s Delights plows back 68.50% of its earnings to take on pro ects tha

Question

Dishwasher's Delights plows back 68.50% of its earnings to take on pro ects that earn the fi m a rate of return of 45 % Dish ashe's stockholders equire a return of 1, on their common stock. Earnings per share are expected to be $2.00 next year. a. What is the expected growth rate for Dishwasher's common stock? (Round your answer to 2 decimal places.) Growth rate b. What is the expected dividend next year? (Round your answer to 2 decimal places.) Dividend s c. What is the intrinsic value of Dishwasher's stock? (Round your answer to 2 decimal places.) Intrinsic value d. If Dishwasher's management chose to pay out all earnings as dividends, what would be the intrinsic value of its stock? (Round your answer to 2 decimal places.) Intrinsic value e. What is the present value of growth opportunities for Dishwasher's Delights? (Round your answer to 2 decimal places.) PVGo

Explanation / Answer

1. Proportion of earnings distributed=68.50%, proportion retained=100-68.5=31.5%

Rate of return=14.5%

Growth=b*r ( where b=retained earnings & r=return of the company)

Growth= 31.5%*14.5% =4.57%

2. Expected dividend next year= dividend current year(1+g)

= 2(1+0.0457) = $2.09

3. Intrinsic value= d1/(ke-g)

= 2.09/(0.11-0.0457) = $32.50

4. If all the earnings are distributed as dividend , then retention is 0. Therefore, growth is 0. Therefore, new intrinsic value is p0= d1/(ke-g) = 2/0.11 = $18.18

5. Present value of growth oppertunity= present value with growth-present value without growth

= $ 32.50-$ 18.18 =$14.32

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