Corporate Finance

Valuation based on past growth scenario

The firm has been growing at 5% per year.   Dividends are proportional to book value and also have grown at 5% annually.  Dividends paid in the most recent year, 2004, were $7.7 million and they are projected to be $8 million next year, in 2005...

So is Mr. Breezeway correct in advising his relative not to sell for book value of $200 per share?

Valuation based on rapid growth scenario

If the firm reinvests all income for the next 5 years (until 2009), dividends paid in that year will reach $14 million, far greater than in the constant growth scenario.  However, shareholders will have to give up dividend payments until 2010 to achieve this rapid growth...

The value of the firm as of the year 2004 is the present value of this amount plus the present value of the dividend to be paid in 2009, which is projected to be $14 million.  (Remember, there will be no dividend flows in the years leading up to 2009.)... Thus, which plan is preferable?

Please see attachment for full question.

Attached file(s):

q-3964.xls  View File