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(Solved) Please show work in excel. What should she assume about


Please show work in excel.

What should she assume about investment and growth? mr. breezeway suggested two valuations, one assuming more rapid expansion and another just projecting past growth. What rate of return should she use?


308

 


 

SECTION THREE

 


 

8 a. The sustainable growth rate is

 

g = return on equity × plowback ratio

 

= 10% × .40 = 4%

 

b. First value the company. At a 60 percent payout ratio, DIV1 = $3.00 as before. Using the

 

constant-growth model,

 

P0 =

 


 

$3

 

= $37.50

 

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which is $4.17 per share less than the company?s no-growth value of $41.67. In this example Blue Skies is throwing away $4.17 of potential value by investing in projects with

 

unattractive rates of return.

 

c. Sure. A raider could take over the company and generate a profit of $4.17 per share just

 

by halting all investments offering less than the 12 percent rate of return demanded by

 

investors. This assumes the raider could buy the shares for $37.50.

 


 

MINICASE

 

Terence Breezeway, the CEO of Prairie Home Stores, wondered

 

what retirement would be like. It was almost 20 years to the day

 

since his uncle Jacob Breezeway, Prairie Home?s founder, had

 

asked him to take responsibility for managing the company.

 

Now it was time to spend more time riding and fishing on the

 

old Lazy Beta Ranch.

 

Under Mr. Breezeway?s leadership Prairie Home had grown

 

slowly but steadily and was solidly profitable. (Table 3.7 shows

 

earnings, dividends, and book asset values for the last 5 years.)

 

Most of the company?s supermarkets had been modernized and

 

its brand name was well-known.

 

Mr. Breezeway was proud of this record, although he wished

 

that Prairie Home could have grown more rapidly. He had

 

passed up several opportunities to build new stores in adjacent

 

counties. Prairie Home was still just a family company. Its com-

 


 

Th

 


 

TABLE 3.7

 

Financial data for Prairie

 

Home Stores, 2000?2004

 

(figures in millions)

 


 

Book value, start of year

 

Earnings

 

Dividends

 

Retained earnings

 

Book value, end of year

 


 

mon stock was distributed among 15 grandchildren and nephews

 

of Jacob Breezeway, most of whom had come to depend on generous regular dividends. The commitment to high dividend payout1

 

had reduced the earnings available for reinvestment and thereby

 

constrained growth.

 

Mr. Breezeway believed the time had come to take Prairie

 

Home public. Once its shares were traded in the public market, the

 

Breezeway descendants who needed (or just wanted) more cash to

 

spend could sell off part of their holdings. Others with more interest in the business could hold on to their shares and be rewarded

 

by higher future earnings and stock prices.

 

But if Prairie Home did go public, what should its shares sell

 

for? Mr. Breezeway worried that shares would be sold, either by

 

Breezeway family members or by the company itself, at too low a

 

price. One relative was about to accept a private offer for $200, the

 

2000

 


 

2001

 


 

2002

 


 

2003

 


 

2004

 


 

$62.7

 

$9.7

 

$6.3

 

$3.4

 

$66.1

 


 

66.1

 

9.5

 

6.6

 

2.9

 

69.0

 


 

69.0

 

11.8

 

6.9

 

4.9

 

73.9

 


 

73.9

 

11.0

 

7.4

 

2.6

 

76.5

 


 

76.5

 

11.2

 

7.7

 

3.5

 

80.0

 


 

Notes:

 

1. Prairie Home Stores has 400,000 common shares.

 

2. The company?s policy is to pay cash dividends equal to 10 percent of start-of-year book value.

 

1 The company traditionally paid out cash dividends equal to 10 percent of start-of-period book value. See

 

Table 5.6.

 


 

https://www.coursehero.com/file/10503275/corporatefinance1320/

 


 

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