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BlueStar Industries Ltd expects to have earnings per share of $4 in year 1. BlueStar...

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Finance

BlueStar Industries Ltd expects to have earnings per share of $4 in year 1. BlueStar Industries plans to retain all of its earnings for years 1 and 2. For the subsequent two years, the firm will payout 40% of its earnings as dividends. It will then payout 80% of its earnings as dividends from that point onward. Each year, retained earnings will be invested in new projects with an expected return of 25% per year. In other words, the return on equity is expected to be 25% per annum for each year. Assume BlueStar Industries shares outstanding remains constant and all earnings growth comes from the investment of retained earnings. If the required rate of return on BlueStar Industries shares is 10%, what price would you estimate for BlueStar Industries shares? Please provide your answer in an excel spreadsheet. Please provide excel formulas in workings.

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