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Chiptech, inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development. the company earned $1.4 a share last year, and just paid out a dividend of $0.63 per share. investors believe the company plans to maintain its dividend payout ratio at 45%. roe equals 24%. everyone in the market expects this situation to persist indefinitely.

a. what is the market price of chiptech stock? the required return for the computer chip industry is 15%, and the company has just gone ex-dividend (i. e., the next dividend will be paid a year from now, at t = 1).

b. suppose you discover that chiptech’s competitor has developed a new chip that will eliminate chiptech’s current technological advantage in this market. this new product, which will be ready to come to the market in 2 years, will force chiptech to reduce the prices of its chips to remain competitive. this will decrease roe to 15%, and, because of falling demand for its product, chiptech will decrease the plowback ratio to 0.4. the plowback ratio will be decreased at the end of the second year, at t = 2: the annual year-end dividend for the second year (paid at t = 2) will be 55% of that year’s earnings. what is your estimate of chiptech’s intrinsic value per share? ( hint: carefully prepare a table of chiptech’s earnings and dividends for each of the next 3 years. pay close attention to the change in the payout ratio in t = 2.)

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