...What is the Rate of Return Percentage? In the mini-case, Mr. Breezeway indicated two kinds of percentage to determine the required return. One of them is the companies' return on book equity (% 15) and the other one is the investment return percentage in the rural supermarket industry (% 11) which shows that investors in rural supermarket chains, with risks similar to Prairie Home Stores, expected to earn about % 11 percent on average. Since the companies' rate of return determined by the rate of return offered by other equally risky stocks, then it should be % 11. The Rapid Growth Scenario Step 1: Being able to calculate the present value of the companies' stocks, we should first calculate the present value of the companies' dividends. Years 2016-2021= 0÷(1.11) + 0÷(1.11)2 +0÷(1.11)3 +0÷(1.11)4 +14÷(1.11)5 +14.7÷(1.11)6 = 8.31+7.86 = 16.17 $ Present value of the dividends between 2016-2021 Step 2 : In step 2, we should estimate the Prairie Stores' stock price at the horizon year (2021), when growth rate has settled down. According to mini-case, after 2019 the company will resume its normal growth. Since the investment plan is going to continue 6 years, we should choose the year 2021 as a horizon year. Growth rate: plowback ratio × return on equity (Given in the notes) Plowback ratio = Retained earnings ÷ Earnings (2021) = 7.4 million ÷ 22 million = 0.33 % 33 Return on equity = Earnings ÷ Book value, start...
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...Minicase: Terence Breezeway, the CEO of Prairie Home Stores has grown his business steadily and was solidly profitable. Most of the supermarkets had been modernized and its brand name was well known. The common stock was distributed among 15 grand children and nephews of Jacob Breezeway. The commitment to high dividend payout had reduced the earnings available for reinvestment and thereby constrained growth. Mr. Breezeway wanted to take Prairie Home public, but what should he sell the shares for? He worried that the shares would be sold, either publicly or privately, at too low a price. One relative was about to accept a private offer of $200, the current book value per share, but Mr. Breezeway had intervened and convinced the would be seller to wait. Prairie Home’s value did not just depend on its current book value or earnings, but on positive future prospects. They called to be 100% by 2011. Unfortunately that would require all of Prairie home’s earnings from 2006 to 2010. After that the company could resume normal dividend payout and growth rate. Mr. Breezeway planned to step aside soon and before then he planned to take the company public, so he drew up a formal report as if the shares were to be publicly traded and thought of the following questions: (he believes it should be traded at 15%, but some rural supermarket chains trade at 11%) 1. What should be assumed about investment and growth according to the following scenario charts...
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