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Growth and Terminal Value

See the attached file.

Walgreen Company reported the following earnings per share from 1989 to 1994.

Year
1989
1990
1991
1992
1993
1994

a. Estimate the arithmetic average and geometric average growth rate in earnings per share between 1989 and 1994. Why are they different? Which is more reliable?
b. Estimate the growth rate using a linear growth model.
c. Estimate the growth rate using a log-linear growth model.

Recalculate the Genoa Pasta problem when:

EBIT is $130 million.
The initial less-stable, fast growth period is 10 years.
The first, fast period growth rate is 15%.
The cost of capital during the slower, stable second period is 12%.

Genoa Pasta manufactures Italian food products and currently earns $80 million in earnings before interest and taxes. You expect the firm's earnings to grow 20 percent a year for the next six years and 5% thereafter. The firm's current after-tax return on capital is 28%, but you expect it to be halved after the sixth year. If the cost of capital for the firm is expected to be 10% in perpetuity, estimate the terminal value for the firm. (The tax rate for the firm is 40%).

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QUESTION
Year Dividends per share
2005 0.22
2006 0.27
2007 0.33
2008 0.4
2009 0.48

a. Estimate the arithmetic average and geometric average growth rate in earnings per share between 2005 and 2009. Why are they different? Which is more reliable?
Prediction
Arithmetic average Geometric Average
Year Dividends per share Yearly growth rate Value Difference Base value Geometric average rate Value Difference
2005 $0.22 $0.22 0.00 $0.22 1.00 =(1+21.5%)^1 $0.22 =base value * 1.00 0.00 =0.22 - 0.22
2006 $0.27 22.7% =(0.27 - 0.22)/0.22 0.27 =0.22 * (1+21.5%)^1 0.00 0.22 1.22 =(1+21.5%)^2 $0.27 0.00
2007 $0.33 22.2% 0.32 =0.22 * (1+21.5%)^2 0.01 0.22 1.48 $0.32 0.01
2008 $0.40 21.2% 0.39 0.01 0.22 1.80 $0.39 0.01
2009 $0.48 20.0% 0.48 0.00 0.22 2.18 $0.48 ...

Solution Summary

Growth and terminal values are examined in the solution.

$2.19