Question

Harvey Gorman expects earnings of $$85.5 million at the end of the year (at t=1) and to pay dividends of $$40.5 million and buy back shares worth $$11.6 million. For the following 13years, earnings should grow at 17.4% annually (until ?=14), after which should grow at 3.5% for a long time. If the firm’s cost of equity capital is 13.2% and the dividend and repurchase rates are expected to stay unchanged, what is the total market value of the Harvey Gorman’s equity?

$$ millions (Give answer to 2 decimal places)

Answer 1

payout in year 1=40.5+11.6=52.10 million

what is the total market value of the Harvey Gorman’s equity

=52.10/(1+13.2%)^1+(52.10*(1+17.4%)^1)/(1+13.2%)^2+(52.10*(1+17.4%)^2)/(1+13.2%)^3+(52.10*(1+17.4%)^3)/(1+13.2%)^4+(52.10*(1+17.4%)^4)/(1+13.2%)^5+(52.10*(1+17.4%)^5)/(1+13.2%)^6+(52.10*(1+17.4%)^6)/(1+13.2%)^7+(52.10*(1+17.4%)^7)/(1+13.2%)^8+(52.10*(1+17.4%)^8)/(1+13.2%)^9+(52.10*(1+17.4%)^9)/(1+13.2%)^10+(52.10*(1+17.4%)^10)/(1+13.2%)^11+(52.10*(1+17.4%)^11)/(1+13.2%)^12+(52.10*(1+17.4%)^12)/(1+13.2%)^13+(52.10*(1+17.4%)^13)/(1+13.2%)^14+((52.10*(1+17.4%)^13*(1+3.5%))/(13.2%-3.5%))/(1+13.2%)^14

=1613.91 million