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?
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
.12 ? .04
vi y re
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.
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-
Financial data for Prairie
Home Stores, 2000?2004
(figures in millions)
Book value, start of year
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
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
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
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