NZ Boatbuilders, Ltd. has some outstanding projects to develop. During the next three years these projects...

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NZ Boatbuilders, Ltd. has some outstanding projects to develop.During the next three years these projects are expected to earn a25% return. However, these projects will be no longer be availablebeginning in the fourth year. At that time, the firm is expected tobegin growing at a constant long-term growth rate of 4%, reflectingthe long-run expected return on projects of 10%. (Note: this is therequired return for NZ Boatbuilders projects.) During the rapidgrowth period, the firm’s dividend payout ratio will be relativelylow (20%) in order to conserve funds for reinvestment. However, thedecrease in growth in the fourth year will also be accompanied byan increase in the dividend payout to 60%. Last year’s earningswere 0 E =$2.00 per share, a dividend payout ratio of 20%. The taxrate is 30%.
a. What should the current price of the common stock be?
b. What characteristics must the projects have in the first 3years and why would those characteristics no longer be truebeginning in year 4?

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4.2 Ratings (490 Votes)

Part a Please see the table below Please be guided by the second column titled Linkage to understand the mathematics The last row contains your answer All financials are in Year n Linkage See Answer

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NZ Boatbuilders, Ltd. has some outstanding projects to develop.During the next three years these projects are expected to earn a25% return. However, these projects will be no longer be availablebeginning in the fourth year. At that time, the firm is expected tobegin growing at a constant long-term growth rate of 4%, reflectingthe long-run expected return on projects of 10%. (Note: this is therequired return for NZ Boatbuilders projects.) During the rapidgrowth period, the firm’s dividend payout ratio will be relativelylow (20%) in order to conserve funds for reinvestment. However, thedecrease in growth in the fourth year will also be accompanied byan increase in the dividend payout to 60%. Last year’s earningswere 0 E =$2.00 per share, a dividend payout ratio of 20%. The taxrate is 30%.a. What should the current price of the common stock be? b. What characteristics must the projects have in the first 3years and why would those characteristics no longer be truebeginning in year 4?