Gorilla, Inc., has recently launched a ramen/sushi fusion dish that has received an overwhelmingly positive reaction from the market. In response to this success, the company is reinvesting all of its earnings to fuel further expansion. This past year, the earnings per share stood at $10, and these are anticipated to increase by 20% annually over the next five years. However, by the end of the fifth year, it's expected that competitors wil introduce similar products. Consequently, analysts forecast that Gorilla will then reduce its reinvestment rate and start distributing 60% of its earnings as dividends. Additionally, from that point onwards, the company's growth rate is projected to decelerate to a stable 3% per annum. If Gorilla's equity cost of capital is 8%, what i the value of a share today? Complete the table below. You can use an Excel spreadsheet and then copy and paste the sheet. Additionally, please provide detailed explanations beneath the table on how to determine the values in each cell, using either equations or descriptive methods.
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- Small Fry, Inc. plans to re-invest all of its earnings to expand its operations. Dividends were $2.00 per share this past year and are expected to grow at a rate of 12% per year until the end of year 4. At that time, competitors are likely to bring out the next sensational new vegan product. Analysts predict that at the end of year 4, Small Fry, Inc. will slow down production and dividend growth will slow to 6%. Small Fry’s current cost of capital is 8%. Find the value of Small Fry’s stock today.V Energy Tech Ltd. has just had a very profitable year as rising energy costs have driven a rapid increase in sales of its solar power cells. The firm also developed a new process which has lowered its manufacturing costs significantly. V Energy Tech believes that this new process will give it a major advantage over its competitors, which it estimates will last for three years. It expects to enjoy high profits during this period, estimating profit growth over the next three years to be 18%, 16% and 13% respectively, before returning to constant industry growth pattern of 6% per year in year 4. V Energy Tech Ltd. has just paid a dividend of $2.50 per share and expects that the dividend will grow at the same rate as its profits. The firm’s cost of capital is 9%. a. What is the firm’s share price today (P0)? b. What is the expected share price next year (P1)? c. Calculate the dividend yield for year 2. d. Calculate the current capital gains yield (year 1).V Energy Tech Ltd. has just had a very profitable year as rising energy costs have driven a rapid increase in sales of its solar power cells. The firm also developed a new process which has lowered its manufacturing costs significantly. V Energy Tech believes that this new process will give it a major advantage over its competitors, which it estimates will last for three years. It expects to enjoy high profits during this period, estimating profit growth over the next three years to be 18%, 16% and 13% respectively, before returning to constant industry growth pattern of 6% per year in year 4. V Energy Tech Ltd. has just paid a dividend of $2.50 per share and expects that the dividend will grow at the same rate as its profits. The firm’s cost of capital is 9%. What is the firm’s share price today (P0)? What is the expected share price next year (P1)? Calculate the dividend yield for year 2. Calculate the current capital gains yield (year 1).
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- Calico Restaurants is planning to create a new online meals-to-order service and has estimated that creating it will have the following effects on its operations: a. Annual revenues will increase from $800,000/year to $1,300,000/year, for the next 3 years. b. While the restaurant earns an EBITDA margin (EBITDA as percent of sales) of 30% currently, it expects to earn an EBITDA margin of 40% on just its incremental online sales. c. The tax rate is 20% and the appropriate cost of capital for online restaurant businesses is 12%. Assuming that there will be an initial cost of $450,000 for creating the service, which will be depreciated straight line over 3 years to a salvage value of zero, estimate the NPV for the investment. a. 112,365 b. 9,865 C. -2,354 d. 6,348Home Place Hotels Inc. is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when completed, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of $3.40. It expects zero growth in the next year. In years 2 and 3, 5% growth is expected, and in year 4, 15% growth. In year 5 and thereafter, growth should be a constant 10% per year. What is the maximum price per share that an investor who requires a return of 14% should pay for Home Place Hotels common stock?Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when it is complete, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of $4.70. It expects zero growth in the next year. In years 2 and 3, 5% growth is expected, and in year 4, 17% growth. In year 5 and thereafter, growth should be a constant 7% per year. What is the maximum price per share that an investor who requires a return of 16% should pay for Home Place Hotels common stock?