Blue Skies’s management
Is investing at an expected return on equity of 10 percent, which is below the return of 12 percent that investors could expect to get from comparable securities.Suppose that Blue Skies’s existing assets generate earnings per share of $5.00.
a. Find the sustainable growth rate of dividends and earnings in these circumstances.
Assume a 60 percent payout ratio.
b. Find the new value of its investment opportunities. Explain why this value is negative despite the positive growth rate of earnings and dividends.
c. If you were a corporate raider, would Blue Skies be a good candidate for an attempted takeover?