Answer and Explanation:
The computation is shown below:
a) Growth rate = ROE × retention ratio
= 23% × (1 - .40)
= 13.80%
Value of stock = D1 ÷ (k - g)
= 0.84 × (1 + .1380) ÷ (.16 - .1380)
= $43.45
b) Revised growth rate after year 2 = 16% × .50
= 8%
Value at T2 = D3 ÷ (k - g)
D3 = Earnings × (1 + G1)^2 × (1 + G2) × Payout ratio
= 2.1 × (1+.1380)^2 × (1+.08) × .50
= 1.47
Value at T2 = 1.47 ÷ (.16 - .08)
= $18.38
Value at T0 = Value at T2 ÷ (1 + r)^n
= 18.38 ÷ (1 + .16)^2
= 13.66
When I started thinking about three key stakeholders of a water utility company, it became a challenge I would never expect. Too many people are interested in it – government, unemployed people, banks, local authorities, and probably I made a wrong choice trying to make a shorter list – please note, these are only my ideas and I will try to explain them.
First, I asked myself without whom this company cannot exist. The answer is obvious: without Affected people such as households, families, and individuals. These people have an extremely high interest in receiving the supply of piped water, as well as in everything that is connected with improving the quality of this service. These people should be catered well; if the quality of the service is bad (e.g., the water is dirty, there is no water during some long periods of time, the fee is too high, etc.) – affected people might do several things, from applying to the court (and, actually, winning the case) to moving in order to change the water utility company.
The other two key stakeholders are the Government and Owners. The government is interested in improving water supply and sanitation services and is responsible for setting taxes, providing opportunities and guidance. The Government sets laws, taxes, and rules – every company must obey them and if it doesn’t, it will lose a lot of money and, probably, won’t exist for a long period of time. The water utility company plays a serious role in the daily life of hundreds and thousands of citizens, and in some cases when something goes wrong the Government can directly regulate how this company works to make sure that affected people are satisfied.
