Problem: Equity Valuation
Compchips Inc. is in the process of completing a restructuring effort. The after tax earnings in the current year are $10M (or $4.00 earnings per share), all of which was paid out as a dividend already. For the coming year earnings are expected to fall by 25%. Of these, 75% are expected to be paid out as a dividend, and the remaining earnings will be ploughed back into the company; the company plans to keep this payout ratio in the future years. After Compchips has completed the restructuring and is expected to grow at the industry's rate of 4%. Compchips equity beta is 1.2, the risk free rate is 5% and the risk premium on the market is 7.5%. (show work )
1) What is the expected return on Compchips equity?
2) What is the total value of Compchips equity at the end of the current year, after the dividend has been paid?
3) What is the share price of Compchips