You Are Trying to Value Godzilla,Inc

question 34

Essay

You are trying to value Godzilla,Inc.You are provided with the following data for the company: the current earnings per share is $2.50; the expected return on assets is 15%; the current dividend payout ratio is 40%,and this rate is expected to stay constant over the next five years,during which time the firm expects high growth; the firm has a debt-equity ratio of 0.5; the firm pays an interest rate of 10% on its debt; after the fifth year,the firm is expected to grow at a constant rate of 8%,and the return on assets will remain unchanged at 15%; the firm's beta is 0.8; the riskless rate is 7%; the expected return on the market is 15%.
a. Value the firm.
b. Mr. Poone Bickens is attempting to take over Godzilla, Inc. He claims that the managers are not managing the firm optimally. In particular, he feels that the firm should prune some of its losing assets and should borrow more money, so that the return on assets will be 20% and the debt-equity ratio will be 1.5. He agrees with the constant growth estimate for the stable phase (after the fifth year and on). Assuming Mr. Bickens is right, how much will he be willing to pay for the firm?