Mini-Case – Finance

In order to learn on an initial offering toll, we must catch at the current financial specify of the smart set, as well as t on the wholey projections for possible future day scenarios. From the data given, we do that Prairie Home Stores (PHS) has a current maintain time assess of $80,000,000. With 400,000 let onstanding tracts, the allow candour per scoreress is $ two hundred. There argon twain possible paths for future performance to consider. The first, a uninterrupted harvest scenario, assumes that PHS exit hide on its current trajectory of salaried out 2/3 of its lucre as divid completions, and retaining the other 2/3 to grow the business.In this scenario, we will continue the follows emersion assess of 5%, with no change in plowback or dividends. In this scenario, outlay per packet is contumacious by the current dividends, divided by (r-g) The value of the confede proportionalityn will be equal to the present value of all future cash flows ( i. e. dividend payments) that investors expect to receive. everlasting maturement scenario EPS 2013 = $ 12,000,000 / 400,000 shares = $ 30. 00 record equity per share in 2013 = $80,000,000 / 400,000 shares = $200. 00 per share Dividends paying(a) out per share in 2013 = $ 8,000,000 / 400,000 shares = $ 20. 00 per share Payout proportion in 2013 = $ 20. 0 (DIV2013) / $ 30 (EPS 2013) = 0. 67 Plowback proportionality 2013 = $10. 00 (RE per share 2013) / $ 30. 00 (EPS 2013) = 0. 33 sustainable process rate = 0. 15 (rate of return) x 0. 33 (plowback ratio) = 5 % Price per share 2012 = DIV2013/(r-g) = $20/(11%-5% ) = $ 333. 33 $ 333. 33 price per share x 400,000 shares = $ 133,333,333 value of the smart set in 2012 P/E ratio = $ 333. 33( price per share) / 30 (EPS) = 11. 11 speedy Growth Scenario Since Price = DIV / r-g, and there are no dividends paid in the historic period 2013 2016, we can calculate the value of the conjunction in 2016 and disregard it to obtain the insert valu e in 2012.EPS 2017 = $21,000,000 / 400,000 shares = $52. 50 Book equity per share 2017 = $139,900,000 / 400,000 shares = $349. 75 Dividends paid out per share 2017 = $14,000,000 / 400,000 shares = $35. 00 Payout ratio in 2017 = $ 35. 00 (DIV per share 2017) / $ 52. 50 (EPS 2017) = 0. 67 Plowback ratio in 2017 = $ 17. 50 (RE in 2017) / 52. 50 (EPS in 2017) = 0. 33 Sustainable growing rate = 0. 15 (rate of return) x 0. 33 (plowback ratio) = 5 % Price per share in 2016= $35. 00 (DIV 2017) / 0. 06 (r g)= $583. 33 Lets discount it to 2012 value Financial calculator FV = 583. 33 N = 4, I/Yr = 11% PV = 384. 5 price per share in 2012 384. 25 x 400,000 shares = 153,700,000 value of the company in 2012 under fast growth Conclusion Rapid growth scenario promises higher(prenominal) ocellus price, so it should be chosen. PVGO amidst the previous example and this one 153,700,000 133,333,333 = 20,366,667 under(a) both scenarios, current price per share is much than $200. Now heres my cal culations Constant growth scenario Assuming a 15% ingestd return P0 = DIV1 / (r-g) = $20 / (. 15 . 05) = $20/. 1 = $200 Assuming an 11% required return, well grow P0 = DIV1 / (r-g) = $20 / (. 11 . 05) = $20/. 06 = $333. 33In the constant growth scenario, the stock is valued at $200 if we assume a 15% expected return, and $333. 33 if we assume 11% expected return. Now, in the rapid growth scenario, things ca use up even to a greater extent than exciting. I think that 2017/2020 is the horizon yr, because its after(prenominal) that drumhead when the growth goes down to 5%. In paragraph 6, the problem states would require reinvestment of all of Prairie Homes fee from 2016 to 2019. After that the company could resume its average dividend payout and growth. your books course of studys20122013201420152016201720182019 my books years20152016201720182019202020212022 year 01234567 arnings growth from previous year&82124. 6%15%15%15%15%5%5% dividend0000$35$36. 75$38. 59 todayH NB neither book shows 2019 or 2022, tho we love that the beginning of the year figures are the same as the end of year figures for the previous year, so thats where I got those. Ultimately, it doesnt really be Im just reinforcing the point that we turn into a constant growth scenario beginning with year 6. Our non-constant growth amaze says this PV = D1/(1+r)1 + D2 / (1+r)2 + + DH / (1+r)H + PH / (1+r)H and we get PH with this verbalism PH = Dt+1 / (r-g) The dividends for the foreseeable future (years 1 4) will all be 0, so hose first verse will add up to 0. We know that the dividend at the horizon year year 5 is $35. The expected future price of the stock at year 5 will be P5 = D6 / (r-g) Plugging in poesy there, we have P5 = $36. 75 / (. 15 . 05) = $36. 75/. 1 = $367. 50 Again, thats assumptive a 15% required return. thusly the third part of the process is to add up all of those numbers, discounting them to the present value P0 = D1 + D2 + D3 + D4 + D5 / (1. 15)5 + P5 / (1. 15)5 = 0 + (35 + 367. 5) / (1. 15)5 = 402. 5/(1. 15)5 Or on the calculator FV = 402. 50, I/YR = 15, N=5, PV = $200. 11 Then we go to the 11% required return.There, well see that P5 = D6 / (r-g) = $36. 75 / (. 11 . 05) = $612. 50 And then P0 = D1 + D2 + D3 + D4 + D5 / (1. 11)5 + P5 / (1. 11)5 = 0 + (35 + 612. 50) / (1. 11)5 = (Calculator FV = 647. 50, I/YR = 11, N = 5, PV = $384. 26) In the rapid growth scenario, the stock is valued at $200. 11 if we assume a 15% expected return, and $384. 26 if we assume 11% expected return. This is the point where I parry to you, or we can talk to the highest degree this more tomorrow. Our math says to price the stock somewhere between $200 and $384, but how do we get? I get the sense that you understand that better than I do, so I can use your input for sure.We suppose that Prairie Home Stores should value the stock at $384. xx because we should choose the We recommend choosing the rapid growth scenario, plowback more earnings into gro wing the company, and set the IPO price as $384. whatever. Our prospectus will show that we intend to invest more of our earnings into growing the company all over the next 4 years, and as a result investors and the market will hold back a price of $384. We chose to use 11% as our expected rate of return, because this is the rate shown in the Journal of Finance as being the rate offered by other, equally risky stocks in the same perseverance as Prairie Home Stores.The PVGO is $153,700,000 133,333,333 = $20,366,667. This indicates that the company has way to grow, which will be attractive to investors. Investors believe that under the rapid growth scenario. tally to our calculations, Mr. Breezeway was wise to counsel his son(??? ) to not portion out the stock for $200, as we believe that the company is worth more than current give-and-take VALUE PER SHARE include something slightly this. $200 per the current values (this is what the whoever chap offered the son), but our c alculations show that the company is more valuable than the $200 price indicates.