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Unformatted text preview: SouthGate Petro, Inc. • SouthGate Petro, Inc. has a payout ratio of 60%. a required rate of return 12% and a growth of 8%. • hat is its PIE tio? If -::. . . . ! - - is . \1.-.0"6- • What is its PIE if r remains the same and g increases to IO"I.? .lD :r/e = .1"2.-.1:' 3D SouthGate Petro, Inc. • SouthGate Petro. Inc. has a payout ratio of 60"10, a required rate of return 12% and a growth of 8%. • What is its PIE if payout drops to 50%? • Notice g = ROE x b. Therefore, when b was 0.4 and g was 8%, ROE was 20%. • Now b changes to 0.5 and ROE does not change at 20%. Therefore, g is now 20% x .5 = 10%. Free Cash Flow Valuation • Lowtech Corp.' s cash flow from operations before interest and taxes is expected to be $2 M and it expects that this will grow at 3% per year forever. The firm re-invests 20% of pretax cash flow each year. The tax rate is 35%. • Depreciation will be $200,000 and is expected to grow at the same rate as operating cash flow....
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.
- Fall '10