Benchmark Metrics Inc. (BMI), an all-equity financed firm, reported EPS of $4.07 in 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $0.83 per share (vs. almost $2 per share in 2007), and retain the instead. The firm has just paid the 2008 dividend, and BMI plans to keep its dividend at $0.83 per share in 2009 as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fu growth internally with a target 45% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 63%. (All dividends and repurchases occur at the end of each year.) Suppose BMI's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 15%, and that reinvestments will account for a earnings growth (if any). Finally, assume BMI's equity cost of capital is 10%. a. Estimate BMI's EPS in 2009 and 2010 (before any share repurchases). b. What is the value of a share of BMI at the start of 2009 (end of 2008)? Hint: Make sure to round all intermediate calculations to at least four decimal places. a. Estimate BMI's EPS in 2009 and 2010 (before any share repurchases). BMI's EPS in 2009 is $. (Round to the nearest cent.) BMI's EPS in 2010 is S. (Round to the nearest cent.) b. What is the value of a share of BMI at the start of 2009 (end of 2008)? The value of a share of BMI at the start of 2009 is $ (Round to the nearest cent.)
Benchmark Metrics Inc. (BMI), an all-equity financed firm, reported EPS of $4.07 in 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $0.83 per share (vs. almost $2 per share in 2007), and retain the instead. The firm has just paid the 2008 dividend, and BMI plans to keep its dividend at $0.83 per share in 2009 as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fu growth internally with a target 45% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 63%. (All dividends and repurchases occur at the end of each year.) Suppose BMI's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 15%, and that reinvestments will account for a earnings growth (if any). Finally, assume BMI's equity cost of capital is 10%. a. Estimate BMI's EPS in 2009 and 2010 (before any share repurchases). b. What is the value of a share of BMI at the start of 2009 (end of 2008)? Hint: Make sure to round all intermediate calculations to at least four decimal places. a. Estimate BMI's EPS in 2009 and 2010 (before any share repurchases). BMI's EPS in 2009 is $. (Round to the nearest cent.) BMI's EPS in 2010 is S. (Round to the nearest cent.) b. What is the value of a share of BMI at the start of 2009 (end of 2008)? The value of a share of BMI at the start of 2009 is $ (Round to the nearest cent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Transcribed Image Text:Benchmark Metrics Inc. (BMI), an all-equity financed firm, reported EPS of $4.07 in 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial crisis, BMI
does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $0.83 per share (vs. almost $2 per share in 2007), and retain these funds
instead. The firm has just paid the 2008 dividend, and BMI plans to keep its dividend at $0.83 per share in 2009 as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fund its
growth internally with a target 45% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 63%. (All dividends and repurchases occur at the end of each year.)
Suppose BMI's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 15%, and that reinvestments will account for all future
earnings growth (if any). Finally, assume BMI's equity cost of capital is 10%.
a. Estimate BMI's EPS in 2009 and 2010 (before any share repurchases).
b. What is the value of a share of BMI at the start of 2009 (end of 2008)?
Hint: Make sure to round all intermediate calculations to at least four decimal places.
a. Estimate BMI's EPS in 2009 and 2010 (before any share repurchases).
BMI's EPS in 2009 is $
(Round to the nearest cent.)
BMI's EPS in 2010 is $
(Round to the nearest cent.)
b. What is the value of a share of BMI at the start of 2009 (end of 2008)?
The value of a share of BMI at the start of 2009 is $
(Round to the nearest cent.)
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