Question

Chapter 18 i Saved Help Save & Exit Submit Check my work Chiptech, Inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development. The company earned $1.20 a share last year, and just paid out a dividend of $0.24 per share. Investors believe the company plans to maintain its dividend payout ratio at 20%. ROE equals 22%. Everyone in the market expects this situation to persist indefinitely. points a. What is the market price of Chiptech stock? The required return for the computer chip industry is 18%, and the company has just gone ex-dividend (i.e., the next dividend will be paid a year from now, at t= 1). (Do not round intermediate calculations. Round your answers to 2 decimal places.) eBook Print Market price of Chiptech stock References b. Suppose you discover that Chiptech's competitor has developed a new chip that will eliminate Chiptech's current technological advantage in this market. This new product, which will be ready to come to the market in two years, will force Chiptech to reduce the prices of its chips to remain competitive. This will decrease ROE to 18%, and, because of falling demand for its product, Chiptech will decrease the plowback ratio to 0.7. The plowback ratio will be decreased at the end of the second year, at t= 2: The annual year-end dividend for the second year (paid at t= 2) will be 30% of that year's earnings. What is your estimate of Chiptech's intrinsic value per share? (Hint: Carefully prepare a table of Chiptech's earnings and dividends for each of the next three years. Pay close attention to the change in the payout ratio in t= 2.) (Round your answers to 2 decimal places.) At time 2 At time 0

Answer 1

Solution :-

(A) Growth (g) = (b) * (r) = (1 - 0.20)*22% = 17.6%

Po (Price) = D0*(1 + g) / (ke - g) = $024*(1+0.176) / (0.18 - 0.176) = $70.56

(B)

Time	EPS	Dividend	(Div%)
0	1.20	0.24	20%
1	1.41	0.28	20%
2	1.66	0.50	30%

Now Growth in Year 3 and After
g = b*r	(18% * 0.70)		12.60%

EPS in Year 3 = $1.66*(1 + 0.1260) = $1.869

Dividend in Year 3 = $1.869 *(1 - 0.70) = $0.561

Price at Year 2 = $0.561 / (18% - 12.60%) = $10.38

Price at Year 0

= $0.24 / (1 + 0.16) + ($0.28 + $10.38)/(1+0.16)²

= $8.13

There is not sufficient time please ask others as seperate one