Burklin, Inc., has earnings of $18.6 million and is projected to grow at a const
ID: 2612919 • Letter: B
Question
Burklin, Inc., has earnings of $18.6 million and is projected to grow at a constant rate of 4 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. The company plans to launch a new project two years from now that would be completely internally funded and require 20 percent of the earnings that year. The project would start generating revenues one year after the launch of the project and the earnings from the new project in any year are estimated to be constant at $7.1 million. The company has 8.10 million shares of stock outstanding.
Estimate the value of the stock. The discount rate is 14 percent. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
Burklin, Inc., has earnings of $18.6 million and is projected to grow at a constant rate of 4 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. The company plans to launch a new project two years from now that would be completely internally funded and require 20 percent of the earnings that year. The project would start generating revenues one year after the launch of the project and the earnings from the new project in any year are estimated to be constant at $7.1 million. The company has 8.10 million shares of stock outstanding.
Explanation / Answer
Dividend paid in year 1 = 18.6*1.04
Dividend paid in year 2 = 18.6*1.04^2 *0.80
Dividend paid in year 3 = (18.6*1.04^3 + 7.1)
Dividend paid in year 4 = 18.6*1.04^4
Value of Firm today = 18.6*1.04/1.14 + 18.6*1.04^2 *0.80/1.14^2 + (18.6*1.04^3 + 7.1)/1.14^3 + (18.6*1.04^4/(14%-4%))/1.14^3
Value of Firm today = $ 195.13631 Million
Value of the stock = Value of Firm today / No of shares of stock outstanding.
Value of the stock =195.13631/8.1
Value of the stock = $ 24.09
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