Mini-Case – Finance

In order to decide on an initial public offering bylay, we must look at the new financial position of the company, as well as make projections for possible future scenarios. From the data given, we fill in that Prairie station Stores (PHS) has a received disc nourish of $80,000,000. With 400,000 outstanding partake ins, the book equity per sh atomic number 18 is $200. There are two possible paths for future performance to consider. The first, a constant offshoot scenario, sucks that PHS pass on deal on its current trajectory of paying out 2/3 of its salary as dividends, and retaining the other 2/3 to grow the business.In this scenario, we will continue the companys growth range of 5%, with no agitate in plowback or dividends. In this scenario, price per constituent is determined by the current dividends, divided by (r-g) The tax of the company will be equal to the present appreciate of all future cash flows ( i. e. dividend payments) that layors postulate to re ceive. Constant growth scenario EPS 2013 = $ 12,000,000 / 400,000 shares = $ 30. 00 Book equity per share in 2013 = $80,000,000 / 400,000 shares = $200. 00 per share Dividends paid out per share in 2013 = $ 8,000,000 / 400,000 shares = $ 20. 00 per share Payout dimension in 2013 = $ 20. 0 (DIV2013) / $ 30 (EPS 2013) = 0. 67 Plowback ratio 2013 = $10. 00 (RE per share 2013) / $ 30. 00 (EPS 2013) = 0. 33 sustainable growth rate = 0. 15 (rate of return) x 0. 33 (plowback ratio) = 5 % price per share 2012 = DIV2013/(r-g) = $20/(11%-5% ) = $ 333. 33 $ 333. 33 price per share x 400,000 shares = $ 133,333,333 value of the company in 2012 P/E ratio = $ 333. 33( price per share) / 30 (EPS) = 11. 11 fast Growth Scenario Since wrong = DIV / r-g, and there are no dividends paid in the long time 2013 2016, we can calculate the value of the company in 2016 and discount it to obtain the Present value in 2012.EPS 2017 = $21,000,000 / 400,000 shares = $52. 50 Book equity per share 2017 = $139 ,900,000 / 400,000 shares = $349. 75 Dividends paid out per share 2017 = $14,000,000 / 400,000 shares = $35. 00 Payout ratio in 2017 = $ 35. 00 (DIV per share 2017) / $ 52. 50 (EPS 2017) = 0. 67 Plowback ratio in 2017 = $ 17. 50 (RE in 2017) / 52. 50 (EPS in 2017) = 0. 33 sustainable growth rate = 0. 15 (rate of return) x 0. 33 (plowback ratio) = 5 % Price per share in 2016= $35. 00 (DIV 2017) / 0. 06 (r g)= $583. 33 Lets discount it to 2012 value Financial calculator FV = 583. 33 N = 4, I/Yr = 11% PV = 384. 5 price per share in 2012 384. 25 x 400,000 shares = 153,700,000 value of the company in 2012 low rapid growth Conclusion Rapid growth scenario promises higher stock price, so it should be chosen. PVGO between the preceding example and this one 153,700,000 133,333,333 = 20,366,667 Under both scenarios, current price per share is more than $200. Now heres my calculations Constant growth scenario assume a 15% necessitated return P0 = DIV1 / (r-g) = $20 / (. 15 . 05) = $2 0/. 1 = $200 Assuming an 11% required return, well have P0 = DIV1 / (r-g) = $20 / (. 11 . 05) = $20/. 06 = $333. 33In the constant growth scenario, the stock is valued at $200 if we assume a 15% expected return, and $333. 33 if we assume 11% expected return. Now, in the rapid growth scenario, things get eventide more exciting. I think that 2017/2020 is the horizon stratum, because its AFTER that hitch when the growth goes down to 5%. In paragraph 6, the problem states would require reinvestment of all of Prairie Homes earnings from 2016 to 2019. After that the company could recuperate its normal dividend payout and growth. your books grades20122013201420152016201720182019 my books years20152016201720182019202020212022 year 01234567 arnings growth from precedent year4. 6%15%15%15%15%5%5% dividend0000$35$36. 75$38. 59 todayH NB neither book shows 2019 or 2022, nevertheless we know that the initiation of the year figures are the same as the end of year figures for the previo us year, so thats where I got those. Ultimately, it doesnt really matter Im just reinforcing the orchestrate that we turn into a constant growth scenario beginning with year 6. Our non-constant growth model says this PV = D1/(1+r)1 + D2 / (1+r)2 + + DH / (1+r)H + PH / (1+r)H and we get PH with this formula PH = Dt+1 / (r-g) The dividends for the foreseeable future (years 1 4) will all be 0, so hose first numbers will play up to 0. We know that the dividend at the horizon year year 5 is $35. The expected future price of the stock at year 5 will be P5 = D6 / (r-g) Plugging in numbers there, we have P5 = $36. 75 / (. 15 . 05) = $36. 75/. 1 = $367. 50 Again, thats assuming a 15% required return. and so the third part of the process is to add up all of those numbers, discounting them to the present value P0 = D1 + D2 + D3 + D4 + D5 / (1. 15)5 + P5 / (1. 15)5 = 0 + (35 + 367. 5) / (1. 15)5 = 402. 5/(1. 15)5 Or on the calculator FV = 402. 50, I/YR = 15, N=5, PV = $200. 11 Then we go to the 11% required return.There, well see that P5 = D6 / (r-g) = $36. 75 / (. 11 . 05) = $612. 50 And then P0 = D1 + D2 + D3 + D4 + D5 / (1. 11)5 + P5 / (1. 11)5 = 0 + (35 + 612. 50) / (1. 11)5 = (Calculator FV = 647. 50, I/YR = 11, N = 5, PV = $384. 26) In the rapid growth scenario, the stock is valued at $200. 11 if we assume a 15% expected return, and $384. 26 if we assume 11% expected return. This is the point where I defer to you, or we can talk about this more tomorrow. Our math says to price the stock somewhere between $200 and $384, but how do we choose? I get the sense that you understand that wear out than I do, so I can use your input for sure.We imagine that Prairie Home Stores should value the stock at $384. xx because we should choose the We urge on choosing the rapid growth scenario, plowback more earnings into growing the company, and set the initial offering price as $384. whatever. Our prospectus will show that we intend to invest more of our earnings into growing the company over the next 4 years, and as a result investors and the market will support a price of $384. We chose to use 11% as our expected rate of return, because this is the rate shown in the Journal of Finance as being the rate offered by other, equally risky stocks in the same industry as Prairie Home Stores.The PVGO is $153,700,000 133,333,333 = $20,366,667. This indicates that the company has room to grow, which will be attractive to investors. Investors believe that under the rapid growth scenario. According to our calculations, Mr. Breezeway was wise to counsel his son( ) to not move the stock for $200, as we believe that the company is worth more than current BOOK VALUE PER SHARE include something about this. $200 per the current values (this is what the whoever dude offered the son), but our calculations show that the company is more invaluable than the $200 price indicates.