Question 1: Star Trek Incorporated has cut its dividend to zero after discovering the secret of the Star Trek transporter. It will continue this policy until 2018 when it will start paying out 60% of its earnings as dividends. Star Trek Inc. has an equity cost of capital of 10%.
a. What will be Star Trek's plowback ratio this year (2013) and for the next 4 years (2014-2017)?
b. What will be Star Trek's plowback ratio in 2018 (and beyond)?
c. If the return from this new technology is 20%, what will be the earnings growth rate of Star Trek Inc. from 2013 to 2018?
d. If the firm earned $1 per share in 2013, how much will it earn (per share) in 2018?
e. What dividend (per share) will Star Trek pay out in 2018?
f. If the return on new investment declines from 20% to 10% in 2018 (and stays at 10% afterwards, in perpetuity), what will be the earnings/dividends growth rate of Star Trek Inc. after 2018?
g. What is the value of one share of Star Trek Inc. one year before it pays out its first dividend (i.e., in 2017)?
h. What is the present value (in 2013) of a share of Star Trek Inc.?
i. Suppose you later learn that the cash flows from this technology have a higher systematic risk than you assumed earlier. How would this information affect your answer to part h (increase, decrease, or no change)? Which variable or variables in the calculation of part h will change (if any)?
Question 2: Facebook launched its initial public offering (IPO) on May 18, 2012. Suppose you were considering whether to buy some Facebook stock on that day.
a. Comparable companies include Zynga, Yelp, and Groupon. Look up their P/E ratios on Yahoo Finance or Google Finance. What's the problem with using comparable P/E ratios to evaluate companies in this industry?
b. Look up Facebook's dividend per share on Yahoo Finance or Google Finance. What should be its price according to the Gordon model?
c. What are some difficulties associated with using a multistage dividend growth model to evaluate the value of Facebook stock?