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Minicase Prairie Stores

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Minicase Prairie Stores
MINICASE REPORT PRAIRIE STORES
What is the Rate of Return Percentage?
In the mini-case, Mr. Breezeway indicated two kinds of percentage to determine the required return. One of them is the companies' return on book equity (% 15) and the other one is the investment return percentage in the rural supermarket industry (% 11) which shows that investors in rural supermarket chains, with risks similar to Prairie Home Stores, expected to earn about % 11 percent on average. Since the companies' rate of return determined by the rate of return offered by other equally risky stocks, then it should be % 11.
The Rapid Growth Scenario
Step 1: Being able to calculate the present value of the companies' stocks, we should first calculate the present value of the companies' dividends.
Years 2016-2021= 0÷(1.11) + 0÷(1.11)2 +0÷(1.11)3 +0÷(1.11)4 +14÷(1.11)5 +14.7÷(1.11)6 = 8.31+7.86 = 16.17 $ Present value of the dividends between 2016-2021 Step 2 : In step 2, we should estimate the Prairie Stores' stock price at the horizon year (2021), when growth rate has settled down. According to mini-case, after 2019 the company will resume its normal growth. Since the investment plan is going to continue 6 years, we should choose the year 2021 as a horizon year.

Growth rate: plowback ratio × return on equity (Given in the notes)

Plowback ratio = Retained earnings ÷ Earnings (2021) = 7.4 million ÷ 22 million = 0.33 % 33

Return on equity = Earnings ÷ Book value, start of the year (2021) = 22 million ÷ 146.9 million = 0.15 % 15

Growth rate = % 33 × % 15 = % 5

Div 2022 = 1.05 ×14.7 P2021 = Dividend 2022 ÷ r - g = 15.44 $ = 15.44 million ÷ 0.11- 0.05 = 257.33 million

Step 3 :Being able to find the present value of total stocks ( at the beginning of 2016), first we should discount the 2021 total stock value by 6 years and we
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