Wayne-Martin Electric Inc. had an outstanding performance for the year 2009 as their solar panel sales exceeded all the competitor’s sales due to their capability of generating 200% more electricity than any other solar panel currently on the market. This fact was clearly reflected in WME’s financial figures. Specifically, the company’s financial statements showed $1,200,000,000 in sales and $300,000,000 in net income. These figures made the shareholders of WME quite happy. The company had a total of 50,000,000 shares outstanding that were actively traded in the major stock exchange of the country. The chief financial officer of WME, Wayne McCorral, decided to retain 50% of the earnings to support the future investments and growth of the company. Dividend payment of WME at the end of year 2009 was consistent with this policy. According to Mr. McCorral the long run growth rate of company’s sales, earnings, and dividends will be 8%.
a. Compute the value of WME’s stock, Po, on January 1st, 2010 if the required rate of return by investors is 12.5%.
b. Compute the expected dividend yield (D1/Po) and capital gains yield for WME's stock.
c. Now assume that the company decides to retain only 25% of its earnings and can achieve a long run growth rate of 4% only. Compute the value of the stock, Po, on January 1st, 2010 under this scenario.
d. Suppose investors regard WME as being quite risky and they believe that required rate of return should 14%, not 12.5%. Redo the calculations for parts a, b, and c with this new information