PS2 - Finance 100: Problem Set 2 1. Company Kickstart is a...

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Finance 100: Problem Set 2 1. Company Kickstart is a hi-tech start-up company that had total after tax earnings of $2m in 1997. Of these, $500,000 were paid out as a dividend to shareholders on December 31 1997, and the remaining dividends are invested to finance future growth. Kickstart’s earnings will grow at a rate of 50% per year starting now (beginning of 1998) for a duration of 3 years. Then it will enter a more mature growth phase and grow at a constant rate of 8% per annum forever after. The cost of equity capital of the firm is 15%. Kickstart will keep the payout policy unchanged for another two years (including 1998). After this it will retain only 40% of after tax earnings. 1.a Value Kickstart using the dividend growth model (as of January 1 1998). 1.b Some analysts estimate that the cost of equity during the high-risk start up years is higher, at 20% p. a., and 15% thereafter. How does this assumption affect the value of Kickstart you found under (1)? 1.c
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This document was uploaded on 06/09/2010.

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PS2 - Finance 100: Problem Set 2 1. Company Kickstart is a...

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