Your PE firm is considering acquiring a publicly traded digital advertising company, Star Dust Enterprises (SDE). The following are some key statistics of the stock of SDE today (t = 0). SDE is 100% equity financed. Its cost of capital (apply this to all cash flows) is 11.2% and the payout ratio is 79%. Expected earnings per share of SDE at next year (t = 1) are $6.6. Assume that without new investments, expected earnings of SDE would remain at their time-1 level in perpetuity. All future investments are expected to generate $0.2 in incremental earnings for each $1 of investment. For an investment made at time t, incremental cash flows are generated starting in year t + 1. (a) Compute expected dividend per share of SDE next year (t = 1): $ (b) Compute expected dividend per share of SDE two years from now (t = 2): $ (c) What is the present value of growth opportunities (PVGO) of SDE today? $ LA
Your PE firm is considering acquiring a publicly traded digital advertising company, Star Dust Enterprises (SDE). The following are some key statistics of the stock of SDE today (t = 0). SDE is 100% equity financed. Its cost of capital (apply this to all cash flows) is 11.2% and the payout ratio is 79%. Expected earnings per share of SDE at next year (t = 1) are $6.6. Assume that without new investments, expected earnings of SDE would remain at their time-1 level in perpetuity. All future investments are expected to generate $0.2 in incremental earnings for each $1 of investment. For an investment made at time t, incremental cash flows are generated starting in year t + 1. (a) Compute expected dividend per share of SDE next year (t = 1): $ (b) Compute expected dividend per share of SDE two years from now (t = 2): $ (c) What is the present value of growth opportunities (PVGO) of SDE today? $ LA
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
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Transcribed Image Text:Your PE firm is considering acquiring a publicly traded digital advertising company, Star Dust Enterprises
(SDE). The following are some key statistics of the stock of SDE today (t = 0). SDE is 100% equity financed. Its
cost of capital (apply this to all cash flows) is 11.2% and the payout ratio is 79%. Expected earnings per share
of SDE at next year (t = 1) are $6.6. Assume that without new investments, expected earnings of SDE would
remain at their time-1 level in perpetuity. All future investments are expected to generate $0.2 in incremental
earnings for each $1 of investment. For an investment made at time t, incremental cash flows are generated
starting in year t + 1.
(a) Compute expected dividend per share of SDE next year (t = 1):
$
(b) Compute expected dividend per share of SDE two years from now (t = 2):
$
(c) What is the present value of growth opportunities (PVGO) of SDE today?
$
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