Rapido SA provides fast-paced on-demand personal tuition in finance through an app. Started only nine years ago, demand for the company’s services has quadrupled during 2020 due to the COVID pandemic, with increased profitability as a result. The most recent pay-out was EUR3.25 per share and is expected to grow at 4.5% per annum. Assume Rapido pays 7% interest on their 5-year bank loan and that investors’ required rate of return on equity is 8%.
Rapido’s main competitor, Superio AG, is part-way through a debt-reduction plan and aims to hit a net debt target of EUR215 million in early 2021. The company has said it will then aim to distribute 55% of net profit to shareholders; a substantial increase on the current 30%. In the last financial year Superio’s turnover was EUR950 million, net profit margin was 5% and total asset turnover was 1.6. The company expects no change in these metrics within the next couple of years. That is the information given.
The question is -
One of Superio’s Board Directors is adamant that investors could be tempted to buy into a new bond issue. If she is correct, how could this change the company’s growth prospects, assuming that Superio does not alter its leverage? Shareholder’s equity was EUR255 million at last financial year-end. Assume that all other metrics remain as outlined in the 2nd paragraph above and that the company has adopted the new 55% pay-out policy. Calculate the new possible rate of growth and explain your results.
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