Question

Benchmark Metrics Inc.​ (BMI), an​ all-equity financed​ firm, reported EPS of $ 5.81 in 2013. Despite the economic​ downturn, BMI is confident regarding its current investment opportunities. But due to the financial​ crisis, BMI does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $ 1.43 per share​ (vs. almost $ 2 per share in​ 2012), and retain these funds instead. The firm has just paid the 2013​ dividend, and BMI plans to keep its dividend at $ 1.43 per share in 2014 as well. In subsequent​ years, it expects its growth opportunities to​ slow, and it will still be able to fund its growth internally with a target 37 % dividend payout​ ratio, and reinitiating its stock repurchase plan for a total payout rate of 59 % . ​(All dividends and repurchases occur at the end of each​ year.) Suppose​ BMI's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 15 % ​, and that reinvestments will account for all future earnings growth​ (if any).​ Finally, assume​ BMI's equity cost of capital is 10 % .

a. Estimate​ BMI's EPS in 2014 and 2015​ (before any share​ repurchases).

b. What is the value of a share of BMI at the start of 2014​ (end of​ 2013)? Hint​: Make sure to round all intermediate calculations to at least four decimal places.​

please write answers for the different years seperately. Thank you

Answer 1