Minicase Prairie Stores Essay

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 law (% 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 near % 11 percent on average. Since the companies score of return determined by the rate of return offered by other equally risky stocks, then it should be % 11. The Rapid Growth ScenarioStep 1 Being adequate to(p) to calculate the present pry 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 2016-2021Step 2 In step 2, we should estimate the Prairie Stores stock value at the horizon year (2021), wh en 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 reside 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 = hold earnings wages (2021)= 7.4 gazillion 22 million= 0.33 % 33Return on equity = Earnings Book value, start of the year (2021)= 22 million 146.9 million= 0.15 % 15Growth rate = % 33 % 15= % 5Div 2022 = 1.05 14.7P2021 = Dividend 2022 r g= 15.44 $ = 15.44 million 0.11- 0.05= 257.33 millionStep 3 Being able to find the present value of total stocks ( at the beginning of 2016), first we should discount the 2021 total stock value by 6 years and we should in any case add the present value of dividends to this amount.P0 = 16.17 $ + 257.33 (1.11)6= 153.75 million $Present Value of the Stock Per plowshare = 153.75 million 400,000 (Outstanding shares)= 384.37 $If the company did go pub lic, its share price should be $384.37 for per share with the rapid growth scenario.The Constant Growth ScenarioGrowth rate plowback ratio return on equity (Given in the notes)Plowback ratio = Retained earnings Earnings (2016)= 4/12= % 33Return on equity = Earnings Book value, start of the year (2016)= 12 80= % 15Growth rate = % 33 % 15= % 5P0 = Div2016 r g Per Share Value = 133.33 million 400,000 = 8 million 0.11 0.05 = 333.33 $= 133.33 millionIf the company did go public, its share price should be $333.33 for per share with the constant growth scenario.ConclusionIf I were Ms. Firewater, I would recommend the rapid growth scenario because with the rapid growth scenario the companies present per share value higher than it could have been with the constant rate scenario. In addition, this investment decision depends on shareholders opinion. As we know, some of the shareholders are dependent on the generous unshakable dividends. As a result, these shareholders might have no t pauperismed to choose the rapid grow scenario. On the other hand, the shareholders who have more interest with the companies hereafter stock value, will probably choose the rapid growth scenario.Mr. Breezeways advise not to sell the companies per stock for $200 was right. Any price low $333.33 for per share will be not acceptable for me, if I am dependant on the dividend income. On the other hand, If I were not need the dividend income and want to sell my shares, I would not accept any price under $384.37 for per share.