Overview
1. Explain with your own example why a company's decision on whether it should finance its investments internally or externally is irrelevant on purely financial grounds. Pattern your example similar to Question 1 in Chapter 11 problems (see problems and solutions).
2. Chapter 11, Problem 5, asks you to determine the intrinsic value of Kylee Lynn Inc. using Bloomberg's DDM three-stage growth model based on the following expectations:
• The stock’s discount rate is 10%.
• Current EPS is $5.00.
• Dividend payout ratio is equal to 30% until the transition period.
• Dividend payout ratio is equal to 50% in the maturity stage.
• Dividend payout ratio increases by equal annual increments from 30% to 50% during the transition stage.
• Kylee Lynn Inc. will experience a growth stage for the next 10 years in which its EPS will grow at 10%.
• The length of Kylee Lynn’s transitional stage is five years.
• The mature growth period starts in year 16 with an assumed dividend payout ratio of 50% and with a growth rate of 6%.
• The transition period starts in year 11 with the growth rate decreasing by equal annual increments from 10% to 6%.
• The value of Kylee Lynn at the beginning of the maturity stage (Year 16) is determine by the constant growth model (V = d/k − g))
The attached worksheet shows Kylee's value calculation of $81.08.
Question: Explain the underlying three-stage DDM growth model incorporating Question 5 in your answer. In the Excel sheet, do a sensitivity analysis showing different values for different EPS, growth rates, and payout ratios (use different values that shown in the Excel sheet).