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
Determine the missing amounts.Unit SellingPriceUnit VariableCostsUnit ContributionMarginContribution MarginRatio1. $650 $390 $en
tatiyna

Answer:

I tried to order the information and prepared the following table:

                                                  Product A           Product B        Product C

Unit Selling Price =                        $650                $200              <u>e)$2,300</u>

Unit Variable Costs =                    $390               <u>c)$108</u>              <u>f)$1,495</u>

Unit Contribution Margin =          <u>a)$260</u>                  $92                $805

Contribution Margin Ratio =         <u>b)40%</u>               d)<u>46%</u>                 35%

contribution margin ratio = (revenue - cogs) / revenue     or      

contribution margin ratio = contribution margin / revenue

8 0
2 years ago
Suppose the price of hot wings is $10, the price of beer is $1, and the consumer’s income is $50. In addition, suppose the consu
IgorC [24]

Answer:

a. budget constraint intersects the vertical axis at 25 beers.

Explanation:

A budget constraint shows all the combinations that a consumer might purchase of two given products or services. The total consumption can be represented by a consumption possibilities frontier curve:

  • originally you could purchase 50 beers or 5 hot wings
  • then as the price of beer increases to $2, you can only buy 25 beers or 5 hot wings

7 0
3 years ago
“If the minimum wage rate is higher than the equilibrium wage rate, fewer people will be hired because the cost of labor is too
icang [17]

If the minimum wage rate is higher than the equilibrium wage rate, fewer people will be hired because the cost of labor is too high. I agree.

Explanation:

  • If the minimum wage is set above the equilibrium wage rate, it has powerful effects. The Labor Market and the Minimum Wage The equilibrium wage rate is $4 an hour. The minimum wage rate is set at $5 an hour. So the equilibrium wage rate is in the illegal region
  • If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there were no minimum wage. If the minimum wage is set above the equilibrium wage rate, it has powerful effects.
  • The equilibrium market wage rate is at the intersection of the supply and demand for labour. Employees are hired up to the point where the extra cost of hiring an employee is equal to the extra sales revenue from selling their output.
  • When the labor market is in equilibrium, the economy is at full employment.
5 0
3 years ago
Of the following activities which is MOST likely to be an interaction between the financial manager and the information systems
ryzh [129]

Answer:

The correct answer is the option A: Developing a system to bill customers, pay suppliers and track inventory.

Explanation:

First of all, an<em> information systems manager</em> has the job of creating, developing and monitoring information systems that could possibly help the organization in its entire structure to improve its performance and therefore that manager focuses in the importance of information as an asset and how could it supports the decision making process for the other executives.

Second of all, a <em>financial manager</em> has the responsability to care about the health of the institution regarding subjects involving money and all of the companies assets. That manager must focuses in the organization of the resources that could help the organization to achieve its goal and how to use them in a proper way.

Finally, in the situation where both of those managers interact together, the main purpose will be to develop an information system, created by the information system manager, that could help the organization to gather information regarding the payment to suppliers, the track of inventory and the bill of customers due to the fact that a system with all that information will help the financial manager to take decisions more properly in order to achieve success.

4 0
3 years ago
“Business may be owned by an individual or a group of persons.” In the light of the
BabaBlast [244]
A successfull investment

4 0
3 years ago
Other questions:
  • Company X's current assets increased by $40 million from 2007 to 2008, while the company's current liabilities increased by $25
    13·1 answer
  • An approach to combining risk identification, risk assessment, and risk appetite into a single strategy. is known as risk protec
    8·1 answer
  • How and why do congress and the president rely on administrative agencies?
    15·1 answer
  • If a fixed asset, such as a computer, were purchased on January 1st for $3,750 with an estimated life of 3 years and a salvage o
    6·1 answer
  • The monetary inflation needed to relieve the social and economic hardships of the late nineteenth century eventually came as a r
    9·1 answer
  • A supply curve shows the relationship between the​ ______ and​ _____ when all other influences on selling plans remain the same.
    7·1 answer
  • American Snacks Inc., a conglomerate, has a strategic alliance with Très Bien Limité, a French snack-maker. However, Très Bien m
    5·2 answers
  • You invest in a mutual fund that charges a 3% front-end load, 2% total annual fees, and a 3% back-end load, which decreases .5%
    9·1 answer
  • ncreased government spending spurs a short-run expansion. Over time, aggregate supply eventually __________, returning the econo
    15·1 answer
  • why did aig get bailed out while lehman brothers did not? group of answer choices it had a stronger balance sheet lehman brother
    8·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!