# PS2Answers - Problem 1) Part 1 Note: the question assumes...

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Problem 1) Part 1 Note: the question assumes that the firm keeps its payout ratio constant at 25% during the high-growth phase; the payout ratio is 60%, starting in 1999. Earnings Dividend 1997 2,000,000.00 500,000.00 1,500,000.00 25% 1998 3,000,000.00 750,000.00 652,173.91 2,250,000.00 25% 1999 4,500,000.00 1,125,000.00 850,661.63 3,375,000.00 25% 2000 6,750,000.00 4,050,000.00 2,662,940.74 2,700,000.00 60% 4,165,776.28 The PV of the dividends through 2000 is: \$4,165,776 Dividends after that date will grow at 8% per year. This value needs to be brought back to Dec 1997 terms. Remember that you have to discount over 3 years (end of 97 to end of 2000)! 2000 PV 62,485,714.29 PV 41,085,371.44 The value of the firm is equal to this value plus the value of the first three years Value = 45,251,147.72 Part 2 If the cost of equity during the start-up years is 20%, then the value is: Earnings Dividend 1997 2,000,000.00 500,000.00 1,500,000.00 25% 1998 3,000,000.00 750,000.00 625,000.00 2,250,000.00 25% 1999 4,500,000.00 1,125,000.00 781,250.00

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## PS2Answers - Problem 1) Part 1 Note: the question assumes...

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