Bellagio’s plc is a chain of Italian restaurants, which has grown rapidly in the UK over recent years, based on the popularity of offering simple, high quality food at a competitive price. It is now expanding into continental Europe, with expectations of increased near-term supernormal growth of 20% per annum for the next four years. After this period growth will slow to a sustainable level, with the expectation of a long term, sustainable “Return on Equity” of 5% per annum. Eve Stephenson heads up the small capitalisation stock investment team at SFC Investors and is considering purchasing Bellagio shares for her funds. She has obtained the following information on the company: Most recent dividend payment: £0.20 per share Most recent earning per share (EPS): £0.50 Forecast annual growth rate for next four years: 20% Yield on Bellagio’s long term bonds: 6% Yield on government long term bonds: 4.5% Bellagio stock Beta: 1.2 Average long term stock market return: 7% Bellagio current share price: £6.53 i. Using the CAPM model determine the required equity return for Bellagio. ii. Determine the sustainable long-term growth rate for Bellagio’s earnings and dividends, based on the retention of equity return, assuming Bellagio’s plan is to maintain the existing dividend pay-out ratio
Bellagio’s plc is a chain of Italian restaurants, which has grown rapidly in the UK over recent years, based on the popularity of offering simple, high quality food at a competitive price. It is now expanding into continental Europe, with expectations of increased near-term supernormal growth of 20% per annum for the next four years. After this period growth will slow to a sustainable level, with the expectation of a long term, sustainable “
Eve Stephenson heads up the small capitalisation stock investment team at SFC Investors and is considering purchasing Bellagio shares for her funds. She has obtained the following information on the company:
Most recent dividend payment: £0.20 per share Most recent earning per share (EPS): £0.50
Yield on Bellagio’s long term bonds: 6%
Yield on government long term bonds: 4.5% Bellagio stock Beta: 1.2
Average long term stock market return: 7% Bellagio current share price: £6.53
i. Using the
ii. Determine the sustainable long-term growth rate for Bellagio’s earnings and dividends, based on the retention of equity return, assuming Bellagio’s plan is to maintain the existing dividend pay-out ratio
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