1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Yakvenalex [24]
1 year ago
14

Assume that Botswana Life Insurance (BOTS LIFE) pays no cash dividends currently and is not expected to for the next 5 years. It

s 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. BOTS LIFE’s market capitalisation rate is 15% per year.
(a) Estimate the intrinsic value per share of the firm [7 Marks]
(b) Assuming its current market price is equal to its intrinsic value, using illustrations, what do you expect to happen to its price over the next year and the year after? [5 Marks]
(c) Illustrate, what effect would it have on your estimate of the intrinsic value if BOTS LIFE is expected to pay out only 20% of earnings starting in year 6? [5 Marks
Business
1 answer:
Advocard [28]1 year ago
6 0

The intrinsic value of company's share is $89.90

The share price is expected to rise in the incoming years

The intrinsic value of share remains the same when payout ratio reduces to 20%

What is the firm growth rate in each of the future years?

The growth rate of the company, which is also the growth rate for earnings per share in each of the first 5 years

Growth rate in the first 5 years=ROE*reinvestment rate

ROE=20%

reinvestment rate=100%(all earnings would be reinvested)

Growth rate in the first 5 years=100%*20%

Growth rate in the first 5 years=20%

Earnings in 5 years=current EPS*(1+growth rate)^5

Earnings in 5 years=$10*(1+20%)^5

Earnings in 5 years=$24.8832

Growth rate for year 6 and beyond=15%*(1-40%)

Growth rate for year 6 and beyond=9.00%

Earnings in year 6=$24.8832*(1+9%)

earnings in year 6=$27.122688

Out of the EPS, 40% would be paid as dividends

dividends in year 6=$27.122688*40%

dividends in year 6=$10.8490752

We can compute the share price at the end of year using the present value formula of perpetuity

share price in year 5=$10.8490752/(15%-9%)

share price in year 5=$180.81792

share price now=$180.81792/(1+15%)^5

share price now=$89.90

The fact that share price and the intrinsic value are the same implies that share price would increase over the next year and the year after because the dividends would continue to growth at a constant rate of 9%

Out of the EPS, 20% would be paid as dividends

dividends in year 6=$27.122688*20%

dividends in year 6=$5.4245376

growth rate=15%*(1-20%)=12.00%

We can compute the share price at the end of year using the present value formula of perpetuity

share price in year 5=$5.4245376/(15%-12%)

share price in year 5=$180.81792

share price now=$180.81792/(1+15%)^5

share price now=$89.90

The share price in payout ratio from 40% to 20% has no effect on the intrinsic value since the share prices are the same under the two scenarios

Find out more about intrinsic value on:brainly.com/question/14720349

#SPJ1

You might be interested in
A plan for a career starting in two years:
r-ruslan [8.4K]

Answer:a) Will give you less opportunities than a career starting right away

wrong

Explanation:

6 0
3 years ago
You have your choice of two investment accounts. Investment A is a five-year annuity that features end-of-month $2,500 payments
oee [108]

Answer:

$119,176.06

Explanation:

Calculation for How much would you need to invest in B today

First step is to calculate the Future value of annuity (FVA)

FVA =$2,500 * ({[1 + (.115 / 12)](5 × 12) - 1} / (.115 / 12))

FVA = $201,462.23

Since we have known the FVA Second Step will be to calculate the Present value (PV)

PV = $201,462.23 × e-1 × .105 × 5

PV= $119,176.06

Therefore the amount that you would need to invest in B today will be $119,176.06

5 0
3 years ago
Reynolds Manufacturers Inc. has estimated total factory overhead costs of $136,400 and expected direct labor hours of 12,400 for
Helga [31]
Jdhdhdhdjsuushdbdbdbudufjrjifufjfjfkfkfkididududjejdjdjfkkfjfjrufifiir
8 0
3 years ago
If you value outdoor recreation, which career might be good for you?
spin [16.1K]
You could be a coach of some sort or you could try to be a profesinal athlete or you could be a triner 
4 0
3 years ago
Read 2 more answers
What program begins with a thirteen-week reintegration treatment program that attempts to improve offenders' basic socialization
oksian1 [2.3K]
This kind of program could be like rehabilitation such as may be provided in a half-way house for people coming out of jail which is designed to help the ex-prisoners to stop the use of illicit drugs, improve socialization skills and find meaningful employment so they can get back on their feet again. Where I live in the province of BC in Canada, it is law that a person can not be barred from employment if his offence was not related to his/her work. 
6 0
3 years ago
Other questions:
  • A company borrows 100,000 today at 12% nominal annual interest. the monthly payment of a 5 year loan is most nearly:
    8·1 answer
  • When American servicemen occupied Japan following World War II, the Japanese watched the Americans playing baseball, appreciated
    6·1 answer
  • The Bigdrill company drills for​ oil, which it sells for​ $200 million to the Bigoil company to be made into gas. The Bigoil
    7·1 answer
  • a bacteria population starts with 200 bacteriaa and grows at a rate of r(t) = (450.268)e 1.12567t bacteria per hour. How many ba
    6·1 answer
  • On January 1, Year 1, Johnston Company purchased a 40% interest in the common stock of Truly Inc. for $100,000. Johnston has sig
    15·1 answer
  • Badger Corporation declared a stock distribution to all shareholders of record on March 25 of this year. Shareholders will recei
    8·1 answer
  • Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry exper
    10·2 answers
  • Explain three types of production technology defined by James D. Thomson and discuss what kind of structure (Mechanic Vs. Organi
    15·1 answer
  • What is something I can create or invent that hasn't been invented yet, that could make me a millionaire?
    9·1 answer
  • For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as foll
    8·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!