Rapid Home Testing (RHT) is a publicly traded all-equity financed firm. RHT's cost of capital is 11.85%. Its current earnings per share is $5.26. This EPS is expected to continue indefinitely. RHT has been paying out all its earnings as dividends It is now year 0, and RHT has just identified a new opportunity to expand its business. This new opportunity allows RHT to invest all of its earnings for 3 years (from year 1 to year 3), starting next year (year 1). Each dollar of new investment will yield a perpetual earnings of 16.04%, starting the following year. (E.g., investing $1 in year 1 will yield payoffs of $0.1604 from year 2 on.) After these 3 years, the competition catches up, driving the return on future investments down to 11.85%, the same as the cost of capital. As a result, RHT will stop making new investments and pay out all its earnings. All cash flows occur at the year end. Use the above information to answer questions (A) – (E). What is RHT's share price without the new investments? answer = 44.3881 dollar then find a)What are RHT's expected earnings per share for year 1, 2, 3, 4 and 5 on?b)What are RHT's dividends per share from year 1, 2, 3, 4 and 5 on? c)What is the current (year 0) share price of RHT with the new investments? d)What is RHT's per-share present value of growth options (PVGO) in dollars?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 4P

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Rapid Home Testing (RHT) is a publicly traded all-equity financed firm. RHT's cost of capital is 11.85%. Its current earnings per share is $5.26. This EPS is expected to continue indefinitely. RHT has been paying out all its earnings as dividends

It is now year 0, and RHT has just identified a new opportunity to expand its business. This new opportunity allows RHT to invest all of its earnings for 3 years (from year 1 to year 3), starting next year (year 1). Each dollar of new investment will yield a perpetual earnings of 16.04%, starting the following year. (E.g., investing $1 in year 1 will yield payoffs of $0.1604 from year 2 on.) After these 3 years, the competition catches up, driving the return on future investments down to 11.85%, the same as the cost of capital. As a result, RHT will stop making new investments and pay out all its earnings. All cash flows occur at the year end.

Use the above information to answer questions (A) – (E).

What is RHT's share price without the new investments?

answer = 44.3881 dollar then find a)What are RHT's expected earnings per share for year 1, 2, 3, 4 and 5 on?b)What are RHT's dividends per share from year 1, 2, 3, 4 and 5 on? c)What is the current (year 0) share price of RHT with the new investments? d)What is RHT's per-share present value of growth options (PVGO) in dollars?

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