Question 2 of 6 2 Inc is an estabilished computer chip firm

Question 2 (of 6) 2. Inc, is an estabilished computer chip firm with several profitable existing products as well as some Chiptech, promising new products in development. The company dividend of so 65 per share, Investors believe the company plans to maintain its dividend payout ratio at i eamed $1.3 a share last year, and just paid out a % ROE equals 23%. Everyone in the market expects this situation to persist idetntely a. What is the market price of Chiptech stock? The required return for the computer chip dustry is 18%, and the Round your answer to 2 decimal places. Omit the \"$\" sign in your response.) Market price of Chiptech stock $ b. Suppose you discover that Chiptech\'s competitor has developed a new chip that will eliminate Chiptech\'s cument technological advantage in this market in 2 years, will force Chiptech to reduce the prices of its chips to remain competitive. This will decrease ROE to 18%, and, because of faling demand for its product. Chiptoch wl decrease the plowback ratio to 0.4. The plowback ratio will be decreased at the end of the second year, at 2 The market. This new product, which will be ready to come to the dividend for the second year (paid at r-2) wa be60% of that year\'s eamngs whe a estimate of Chiptech\'s intrinsic value per share? (Hint: Carefully prepare a table of Chiptech\'s nt 2) (Round your answers to 2 decimal places. Omit the \"3\" sign in your response.) and dividends for each of the next 3 years. Pay close attention to the change in the pryout ratio At time 2 As sime 0 esc F1 F3 F5

Solution

ROE 23.00% Payout Ratio 50.00% Dividend Paid $0.65 a) Expected ROE 18.00% Payout Ratio 50.00% Dividend Paid $0.65 g = ROE ? b = ROE x (1 – payout ratio) = 23% x (1 - 50%) 11.50% Intrinsic Value = D0 x (1 + g) / r -g Intrinsic Value = .65 x (1 + 11.50) /18% - 11.50% $11.15 b) Time EPS Dividend 0 $1.30 $0.65 1 $1.42 $0.57 g = 9%, plowback =50% 2 $1.54 $0.93 g = 9%, plowback =60% 3 $1.66 $0.99 EPS grows by (40%) x (18%) = 7.2% and payout ratio = 60% EPS3= $1.54x(1+7.2%) = $1.66 and D3= payout ratio x EPS3= 0.6 x $1.66 = $0.99 g = ROE ? b = ROE x (1 – payout ratio) = 18% x (1-50%) 9.00% The dividends and earnings can be assumed to grow at a constant rate of g = 9.5% after year 2. At time 2 = D3/(r -g) = $1.66 /(18% - 7.2%) $9.20 Year Cash flow PV @ 18% Present Value 1 $0.57 0.8475 $0.48 2 $10.13 0.7182 $7.27 (year 2 cash flow = 1.54+9.20) Present Value $7.75 Revised estimate of intrinsic value per share at time 0 $7.75