Question

Dishwasher’s Delights plows back 68.50% of its earnings to take on projects that earn the firm a rate of return of 14.50%. Dishwasher’s stockholders require a return of 11.00% on their common stock. Earnings per share are expected to be $2.00 next year.

d. If Dishwasher’s management chose to pay out all earnings as dividends, what would be the intrinsic value of its stock?

e. What is the present value of growth opportunities for Dishwasher's Delights?

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

d. Dividend per share (D1)

D1= EPS x (1 – Plowback Ratio)
= 2* (1–0.0)
=$2 per share

As per Gordon Growth Model of Stock Valuation:

P=D1/(Re-g)

P= price of the share.
D1= dividend 2
g= Growth rate 0%
Re= required rate of return. 11%

P=D1/(Re-g)

Calculation of Price (P)

P = D1 / (Re – g)

= $2 / (0.11)

= $2 / 0.11

= $18.18 per share

Price per share(P) $18.18 (ANSWER)

E.
Calculation of the Growth Rate (g)

Growth Rate = Return on Equit*Plowback Ratio
=14.50%* 0.6850
=9.9325%

Dividend = 2*(1-0.6850) = 0.63

Price with growth (Pg) = 0.63/(0.11-0.0993)
= $58.88

The Present Value of Growth8 Opportunities (PVGO)

PVGO= Pg - P = 58.88-18.18 = $40.7 (ANSWER).