Matt’s Lemonade Stand is one of the most up and coming places to get lemonade. I’m looking to take it public by splitting up the company into 100 shares and selling some of them. a) Suppose an inside source tells you that last summer the lemonade stand made $1,000. They expect the same for all summers in the foreseeable future. You assign a discount rate of 10% annually. What are you willing to pay for a single share given the information you’ve received from the inside source? (Assume throughout that the firm does not retain any of its earnings so that all earnings are paid to shareholders as dividends). b) Suppose instead that I claim the information about cashflow last summer was correct but I’m planning to expand so I think there will be 5% growth forever. Now what are you willing to pay for a share if your required rate of return does not change from 10%? c) You correctly point out that this growth will not be sustainable. Instead you think that there will be 5% growth for 10 years after which, there will be no growth. What are you willing to pay for a share again using a 10% discount rate?
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Matt’s Lemonade Stand is one of the most up and coming places to get lemonade. I’m looking to take it public by splitting up the company into 100 shares and selling some of them.
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a) Suppose an inside source tells you that last summer the lemonade stand made $1,000. They expect the same for all summers in the foreseeable future. You assign a discount rate of 10% annually. What are you willing to pay for a single share given the information you’ve received from the inside source? (Assume throughout that the firm does not retain any of its earnings so that all earnings are paid to shareholders as dividends).
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b) Suppose instead that I claim the information about cashflow last summer was correct but I’m planning to expand so I think there will be 5% growth forever. Now what are you willing to pay for a share if your required
rate of return does not change from 10%? -
c) You correctly point out that this growth will not be sustainable. Instead you think that there will be 5% growth for 10 years after which, there will be no growth. What are you willing to pay for a share again using a 10% discount rate?
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