Problem
You have been provided the following information on 123 REIT. 123 REIT has a book value of equity $10 billion, and the REIT has no debt outstanding. The REIT earned $1.75 billion last year. The REIT's cost of equity is 11%.
I. Assume the REIT will be able to grow its economic value added 3% a year in perpetuity. Estimate the value of the REIT using the EVA model.
II. You have been asked to assess the implied growth rate of economic value in 123 REIT. Assume that the market is pricing the equity of 123 REIT correctly today (the price as of the beginning of the current year is $27.5 per share and shares outstanding were 700,000,000). In addition, assume that the market value of the newly issued debt equals its book value. Estimate the implied growth rate of economic value added that is needed to equate the present value of the REIT to its market value.