Growth and Terminal Value
Not what you're looking for?
See the attached file.
Walgreen Company reported the following earnings per share from 1989 to 1994.
Year
1989
1990
1991
1992
1993
1994
a. Estimate the arithmetic average and geometric average growth rate in earnings per share between 1989 and 1994. Why are they different? Which is more reliable?
b. Estimate the growth rate using a linear growth model.
c. Estimate the growth rate using a log-linear growth model.
Recalculate the Genoa Pasta problem when:
EBIT is $130 million.
The initial less-stable, fast growth period is 10 years.
The first, fast period growth rate is 15%.
The cost of capital during the slower, stable second period is 12%.
Genoa Pasta manufactures Italian food products and currently earns $80 million in earnings before interest and taxes. You expect the firm's earnings to grow 20 percent a year for the next six years and 5% thereafter. The firm's current after-tax return on capital is 28%, but you expect it to be halved after the sixth year. If the cost of capital for the firm is expected to be 10% in perpetuity, estimate the terminal value for the firm. (The tax rate for the firm is 40%).
Purchase this Solution
Solution Summary
Growth and terminal values are examined in the solution.
Solution Preview
Please see ** ATTACHED ** Word Document for complete solutions and details!
QUESTION
Year Dividends per share
2005 0.22
2006 0.27
2007 0.33
2008 0.4
2009 0.48
a. Estimate the arithmetic average and geometric average growth rate in earnings per share between 2005 and 2009. Why are they different? Which is more reliable?
Prediction
Arithmetic average Geometric Average
Year Dividends per share Yearly growth rate Value Difference Base value Geometric average rate Value Difference
2005 $0.22 $0.22 0.00 $0.22 1.00 =(1+21.5%)^1 $0.22 =base value * 1.00 0.00 =0.22 - 0.22
2006 $0.27 22.7% =(0.27 - 0.22)/0.22 0.27 =0.22 * (1+21.5%)^1 0.00 0.22 1.22 =(1+21.5%)^2 $0.27 0.00
2007 $0.33 22.2% 0.32 =0.22 * (1+21.5%)^2 0.01 0.22 1.48 $0.32 0.01
2008 $0.40 21.2% 0.39 0.01 0.22 1.80 $0.39 0.01
2009 $0.48 20.0% 0.48 0.00 0.22 2.18 $0.48 ...
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
Recent Feedback
- "Thank you."
- "thank you Chidi Ngene.. if you have any APA references would be great"
- "Thank you so much for your help, your explanations were easy to understand and apply!"
- "are you able to highlight the equations used either on the xlsx or a word doc as to how each graph was formed- overall looks fine i just need help understanding this myself"
- "Chidi Ngene, M. Sc. Was extremely helpful as without the help and guidance I would have failed, but with the help I passed. I still have a lot to learn and in need of the guidance to understand and learn more on the subject. I would recommend Chidi Ngene and BrainMass to anyone that are in need of help. Thank you!!"
Purchase this Solution
Free BrainMass Quizzes
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Basics of corporate finance
These questions will test you on your knowledge of finance.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Learning Lean
This quiz will help you understand the basic concepts of Lean.