Size of Vegas Chips – declare of Roe 15% means medium reliance on share funding also relates $1.2 per share Growing corporation – will increase in coming years
Q1. The Analyst who produce report A makes the assumption that Vegas Chips will remain a small, regional company that, although profitable , is not expected to grow In this case, Vegas Chips management is expected to elect to pay out 100% of earnings as dividends.
Q2. The analyst who produced report B makes the assumption that Vegas Chips will enter the national market and grow at a steady, constant rate. In this case, Vegas Chips management is expected to elect to pay out 40% of earnings as dividends. The analyst discloses news that this dividend has just been committed to current stockholders.
Q3. The analyst who produced report also makes the assumption that Vegas Chips will enter the national market but expects a high level of initial excitement for the product that is then followed by growth at a constant rate. Earnings and dividends are expected to grow at a rate of 50% over the next year, 20% for the following two years and then revert back to a constant growth rate of 9% thereafter. The analyst also discloses that Vegas Chips’ management has just announced the pay out of 40% of the recently reported earnings to current stockholders. What model can you use to value a share of common stocks
Q4.Discuss the features (s) that drive the differing valuations of Vegas Chips. What additional information do you need to garner confidence in the projections of each analyst report?In conclusion, the various features that drive the deferring valuations of Vegas Chips are mainly the varying growth rates and future earnings expectation from shareholders. It’s difficult to predict future as we all know future is uncertain. As such, historical data may provide more insight of the company and may provide the basis to determining the future growth although the leak between the two is at time weak. In order to gain more confidence, we may need to request the following addition information, which is described below
Mini-Case (Page 179)
Tuesday Evening Class
Mini Case Study Summary
Your Investment adviser has sent you three analyst reports for a
young , growing company named Vegas Chips, Incorporated . These
reports depict the company as speculative, but each one poses
different projection of the company’s future growth rate in earnings
All three reports show ;
Vegas Chips earned $1.20 per share in the year just ended.
There is consensus that a fair rate of return to investors for this
common stock is 14%
That management expects to consistently earn a 15% return on
the book value of equity (ROE = 15%)
The company should use the Variable Growth
Model to value its stock
Variable growth Model is used because the
company’s dividend growth rate varies
It is also indicates a rapid growth rate in the first
Becomes constant thereafter
Audited Annual Financial statement
Percentage of market share
Projections, forecasts, budget
List of competitors and estimated annual
billings in the Target’s market areas
Legal litigation against the company.