FKK LLC is expected to have 3 years more of above industry growth with 10%, 9%...
FKK LLC is expected to have 3 years more of above industry
growth with 10%, 9% and 8%. Last year EPS was $10. FKK’s managers
have been consistently paying half of its profits to shareholders
and will keep payout ratio at this level during three years of
extraordinary growth. However, as competition increases they plan
to level off reinvestment rate to 25% after 3 years. In three years
the broadband industry will bring on average 16% of accounting
return on investment forever. Required return on equity is
12%.
1. Determine fair value of FKK's stock.
2. Evaluate management’s decision to decrease reinvestment rate in
the stable period?
3. Describe the multiples approach to firm valuation. Assess the
advantages and weaknesses.
Homework Answers
![Fair value at year endy it b=50% [ where gabxr] DPS₂ (1+ bxh) 6.4746 (1+0.5000:16) Re - bx& 0.12 - 0.50 00.16 6.4746 x 1.08 0](http://img.homeworklib.com/questions/7636d630-77b6-11ea-a1eb-d59fbe59de7f.png?x-oss-process=image/resize,w_560)
3. Firm can also be valued using Walter Method which gives a better valuation technique for decision making in respect of dividend payout ratio and retention ratio which the company should adopt to optimize investment opportunity.
Walter Model = 
Weakness - It does not take into account the effect of growth rate.
Note- Growth rate (g) = b x r
where b = retention rate or reinvestment rate
and r = required rate of return.
For any query or clarification, please leave a comment.
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