1. An investor owns some stock in Harry's Pottery Inc.
The stock recently underwent a 5-for-3
stock split. If the stock was trading at $40.00 per share just before the split, how much is each share most likely selling for after the split? If the investor owned 200shares of the stock before the split, how many shares would she own afterward? If the stock was trading at $40.00 per share just before the split, then after the split each share most likely selling for $24. Solution (3/5) *40 = $24 If the investor owned 200 shares of the stock before the split, the number of shares she would have after the split is 333. (Solution (5/3) *200 = 333.33 2. Ron's Rodents Co. has total assets of $5.0 million, total short- and long-term debt of $2.8 million, and $400,000 worth of 8% preferred stock outstanding. What is the firm's total book value? What would its book value per share be if the firm had 50,000 shares of common stock outstanding? The firm’s total book value is $1,800,000 Solution: Accounting equation = A=L+E; E=A-L Book value (i.e. E) = Total Asset – Total debt – Preferred Stock Total Asset = 5M; Total Debt = 2.8M; Preferred stock = $400k 5m-2.8m-400k = 1.8M If the firm had 50,000 shares of common stock outstanding, its book value per share would be $36 Solution: BV per share = Book value/# of CS share outstanding = 1.8M/50k = $36 3. The MedTech Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1.0 million per year. The firm’s EPS is $5.92 Solution: EPS = (NI-Preferred dividends)/# of CS shares outstanding = (15.8M-1M)/2.5M = $5.92 If the firm paid $2.00 per share to common stockholders, its dividend yield would be 3.33% Solution: Div Yield = Annual div received per share/current market price of stock = 2/60(given) = 3.33% If the firm it paid $2.00 per share in dividends, its dividend payout ratio would be 33.78% Solution: Div Payout ratio = Div per share/EPS = 2/5.92 = 33.78% 4. Total assets ($millions) 240 Total debt ($millions) 115 Preferred stock ($millions) 25 Common stockholders' equity ($millions) 100 Net profit after taxes ($millions) 22.5 Number of preferred stock outstanding (millions) 1 Number of common stock outstanding (millions) 10 Preferred dividends paid (per share) 2 Common dividends paid (per share) 0.75 Market price of the preferred stock ($/per share) 30.75 Market price of the common stock ($/per share) 25
The company’s book value is $100M
Solution: Book value = Total Asset – Total Debt – Preferred Stock = 240-115-25 = $100M The book value per share is $10 Solution: BV per share = Book value/# of CS shares outstanding = 100M/10M = $10 The EPS is $2.05 Solution: EPS = NI-Preferred dividends)/# of CS shares outstanding = (22.5M-[2*1M])/10M = $2.05 The div pay out ratio is 36.59% Solution: Div Payout ratio = Div per share/EPS = 0.75/2.05 = 36.59% The dividend yield on the CS is 3& Solution: Div Yield = Annual div received per share/current market price of stock = 0.75/25 = 3% The dividend yield on the PS is 6.5% Solution: Div Yield = Annual div received per share/current market price of stock = 2/30.75 = 6.5% 5. West Coast Utilities had a net profit of $900 million. It has 900 million shares outstanding and paid annual dividends of $0.90 per share. What is the dividend payout ratio? Solution: Div Payout ratio = Div per share/EPS; EPS = (NI-Preferred dividends)/# of CS shares outstanding EPS = 900M/900M = $1; Payout = .9/1 = 90% 6. Southern Cities Trucking Company has the following five-year record of earnings per share. 2012 - $1.40 2013 - $2.10 2014 - $1.00 2015 - $3.25 2016 - $0.80 If they pay out dividends at a fixed ratio of 40% of EPS, the total of the dividends over the 5- year period is $3.42 Solution: Div Payout ratio = Div per share/EPS; Div per share = payout*EPS 2012 = 1.4*.4 = .56 2013 = 2.10*.4 = .84 2014 = 1*.4 = .4 2015 = 3.25*.4 = 1.3 2016 = .8*.4 = .32 Total: 3.42 If they pay out dividends at a fixed rate of $1.00 per share, the total of the dividends over the 5- year period is $5 Solution: Total div = Fixed dollar rate *5 = $5 7. Bruce buys $40,000 of UH-OH Corporation stock. Unfortunately, a major newspaper reveals the very next day that the company is being investigated for accounting fraud, and the stock price falls by 22%. What is the percentage increase now required for Bruce to get back to $40,000 of value? Ending investment value = $40,000*(1-.22) = $31200 Percentage increase = [(BEG investment value/Ending investment value)-1] *100 9. A firm has $750 million in total assets, no preferred stock, and total liabilities of $300 million. There are 300 million shares of common stock outstanding. The stock is selling for $5.25 per share. What is theprice-to-book-value ratio? 3.5 Solution: Price to BV ratio = Market Price of CS/BV per share Book Value = Total Asset – Total liabilities – Preferred Stock Book value = 750M-300M = 450M Book value per share = Book value/# of CS shares outstanding Book value per share = 450M/300M = $1.5 Price to BV value = 5.25/1.5 = 3.5 10. ZIPBIT common stock is selling at a P/E of 10.0 times trailing earnings. The stock price is $23.50. What were the firm's earnings per share? $2.35 EPS = (NI-Preferred dividends)/# of CS shares outstanding OR P/E ratio = Current Market Price of stock/EPS EPS = Current Market Price/PE ratio EPS = 23.50/10 = $2.35 11. Find the EPS, P/E ratio, and dividend yield of a company that has 5 million shares of common stock outstanding (the shares trade in the market at $25.00), earns 10% after taxes on annual sales of $150 million, and has a dividend payout ratio of 35.00%. At what rate would the company's net earnings be growing if the stock had a PEG ratio of 2.00? The stock EPS is $3. Solution: EPS = (NI-Preferred dividends)/# of CS shares outstanding Net Income = Sales*net profit margin (from the net profit margin formula) Net Income = 150M*10% = 15M EPS = 15M/5M = $3 The P/E ratio = 8.3 Solution: P/E ratio = Current Market Price of stock/EPS = 25/3 = 8.3 The stock dividend yield is 4.20% Solution: Div Yield = Annual div received per share/current market price of stock Div Payout ratio = Div per share/EPS Div per share = Payout ratio*EPS Div per share = 35%*3 = $1.05 Div yield = 1.05/25 = 4.2% If the stock had a PEG ratio of 2.00, the rate that the company's net earnings would be growing is 4.17%. PEG ratio = PE ratio/3-5 years earning 3-5 year’s earnings = PE ratio/PEG ratio = 8.3/2 = 4.17% 12. Highgate Computer Company produces $1.8 million in profits from $27 million in sales. It has total assets of $15.0 million. Total asset turnover = Sales revenue/total assets Total asset turnover = 27M/15 = 1.8 Net profit margin = net profits/Sales revenue Net profit margin = 1.8/27 = 6.67% ROA = Net profit/total asset ROA = 1.8/15 = 12% ROE = Net profit/stockholders’ equity ROE = 1.8M/6M = 30% (6M total net worth given) Book value per share = book value (or equity)/# of CS shares outstanding Book value per share = 6M/500K = $12 (500k given in the problem) 13. Stroud Sporting Gear Inc. has a net profit margin of 9.00%, a total asset turnover of 2.40, total assets of $225 million, and total equity of $120 million. What is the company's return on equity? ROE = net profit margin*total asset turnover*(total asset/SE) ROE = .09*2.4*(225/120) = 40.50% 14. Financial Learning Systems has 2.5 million shares of common stock outstanding and 100,000 shares of preferred stock. (The preferred pays annual cash dividends of $5.00 a share, and the common pays annual cash dividends of 25 cents a share.) Last year, the company generated net profit (after taxes) of $6,850,000. The company's balance sheet shows total assets of $78 million, total liabilities of $32 million, and $5 million in preferred stock. The firm's common stock is currently trading in the market at $45.00 a share. EPS = (NI-Preferred dividends)/# of CS shares outstanding EPS = ($6,850,000-[5*100k])/2.5M = 2.54 P/E ratio = P/E ratio = Current Market Price of stock/EPS = 45/2.54 = 17.72 BV per share = Book value/# of CS share outstanding Book value = Total asset – Total debt – PS = 78M-32M-5M = $41M BV per share = 41M/2.5M = $16.40 If EPS rises to $3.75 and the P/E ratio stays where it is, the new price is $66.44 P/E ratio = Current Price of the stock/EPS Current Price of the stock = P/E ratio*EPS = 17.72*3.75 = 66.44 When the EPS rises (drops) for a given P/E multiple, the market price of the stock increases (decreases). When both the EPS and P/E multiple rise (drop), the market price of the stock increases (decreases) to a greater degree. 16. An investor estimates that next year's sales for Dursley's Hotels, Inc., should amount to about $100 million. The company has 5.0 million shares outstanding, generates a net profit margin of about 10.0%, and has a payout ratio of 50%. All figures are expected to hold for next year. Given this information, compute the following. The estimated net earnings for next year is $10 million. Solution: Estimated profit = Estimated Sales*Expected profit margin (from net profit margin) Estimated profit = 100M*10% = $10M The div per share for next year = $1 Div payout = Div per share/EPS Estimated EPS = 10M/5M = $2 Estimated div per share = div payout*EPS = 50%*2 = $1 Assuming the P/E ratio is 24.5 times earnings, the expected price of the stock is $49 PE ratio = Expected price of the stock/Estimated EPS Expected Price = PE ratio*estimated EPS = 24.5*2 = $49 The expected holding period return is 25 Holding Period return= (div + capital gain/loss)/BEG investment value Holding period return = [$1+(49-40)/40 = 25% ($40 is given in the problem; $49 is from expected price of the stock from previous problem) 17. High Teck has a ROE of 15.0%. Its earnings per share are $2.00, and its dividends per share are $0.20. Estimate High Teck's growth rate. g = ROE * Retention rate (where retention rate = 1-payout ratio) g = 15%*(1 - [0.20/2]) g = 15%*0.9 g = 13.5% 18. Melissa Popp is thinking about buying some shares of R.H. Lawncare Equipment, at $48.00 per share. She expects the price of the stock to rise to $60.00 over the next 3 years. During that time, she also expects to receive annual dividends of $4.00 per share. What is the intrinsic worth of this stock, given a required rate of return of 12%? Use calculator (NPV) CF0 = 0 CF1 = 4 Cf2 = 4 Cf3 = 60+4 I = 12% NPV = 52.31 What is expected return? CF0 = -148 Cf1 = 4 Cf2 = 4 Cf3 = 64 IRR = 15.5% 19. Investors expect that Amalgamated Aircraft Parts, Inc., will pay a dividend of $2.50 in the coming year. Investors require a rate of return of 12.0% on the company's shares, and they expect dividends to grow at 7.0% per year. Using the dividend valuation model, find the intrinsic value of the company's common shares. *Use constant growth formula = next year’s div/(i-g) Intrinsic value = 2.5/(12%-7%) = $50 20. Larry and Curley are brothers. They're both serious investors, but they have different approaches to valuing stocks. Larry, the older brother, likes to use the dividend valuation model. Curley prefers the free cash flow to equity valuation model. As it turns out, right now, both of them are looking at the same stock—American Home Care Products, Inc. (AHCP). The company has been listed on the NYSE for over 50 years and is widely regarded as a mature, rock-solid, dividend-paying stock. The brothers have gathered the following information about AHCP's stock: Current Dividend (D0) = 2.5 per share Current free cash flow (FCF0) = $1M G = 5% R = 12% Shares outstanding = 400k How would Larry and Curley each value this stock? Dividend method using constant growth = [2.5(1.05]/(.12-.05) = $37.5 price per share FCF method using constant growth = [(1*1.05)/(.12-.05)]/400k = $37.5 price per share 21. This year, Shoreline Light and Gas (SL&G) paid its stockholders an annual dividend of $3.00 a share. A major brokerage firm recently put out a report on SL&G predicting that the company's annual dividends should grow at the rate of 10% per year for each of the next five years and then level off and grow at the rate of 6% a year thereafter. (Note: Use four decimal places for all numbers in your intermediate calculations.) Using the variable-growth DVM and a required rate of return of 12%, the maximum price you should be willing to pay for the stock is $62.65. D0 = 3.0 cfo = $0 D1 = 3(1.10) = 3.3 cf1 D2 = 3.3(1.10) = 3.63 cf2 D3 = 3.63(1.10) = 3.99 cf3 D4 = 3.99(1.10) = 4.39 cf4 D5 = 4.39(1.10) = 4.83 cf5 P = [4.83(1.06])/(.12-.06) = 85.33 cf5 = 90.16 Then, use CFO NPV = 62.63 Redo the SL&G problem in part a, this time assuming that after year 5, dividends stop growing altogether (for year 6 and beyond, g=0). Use all the other information given to find the stock's intrinsic value. Cf0 = 0 Cf1 = 3.3 Cf2 = 3.63 Cf3 = 3.99 Cf4 = 4.39 Cf5 = 4.83 Cf5 = (4.83/12% - this is using zero growth) = 40.25+4.83 = 45.08 NPV = 37.05 From the results above, we can conclude that the dividend valuation model is very sensitive to the growth rate in dividends and the duration of dividend payments; the higher the rate of growth in dividends, the higher the intrinsic value of the stock. The longer dividends are expected to be paid, the higher the intrinsic value of the stock. 22. Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and to place a value on the company's stock. Here's what you find: This year, Oasis paid its stockholders an annual dividend of $3.00 a share, but because of its high rate of growth in earnings, its dividends are expected to grow at the rate of 12% a year for the next 4 years and then to level out at 9% a year. So far, you've learned that the stock has a beta of 1.80, the risk-free rate of return is 5%, and the expected return on the market is 11%. Using the CAPM to find the required rate of return, put a value on this stock. Using the CAPM, the required rate of return on the investment is 15.80%. CAPM = 5% + 1.8*(11%-5%) = 15.8% The value of the company's stock is $53.12. Cf0 = 0 Cf1 = 3(1.12) = 3.36 Cf2 = 3.36(1.12) = 3.76 Cf3 = 3.76(1.12) = 4.21 Cf4 = 4.21(1.12) = 4.72 Cf4 = P = (4.72*1.09)/(.158-.09) = 75.67+4.72 = 80.39 NPV = $53.12 23.
Total assets $50,000,000
Total equity $25,000,000 Net income $3,750,000 EPS $5.00 Dividend payout ratio 40% Required return 12.0%
Using constant growth model to value stock
Constant growth model = D1/(r-g) Dividend payout ratio = Div per share/EPS Div per share = Payout*EPS = 40%*5 = $2.00 g = ROE*retention rate ROE = Net income/stockholder’s equity = 3750000/25000000 = .15 (15%) g = 15%*60% = 9% Price of the stock = (2*1.09)/(.12-.09) = $72.67 *24 and 25 will be in the excel spreadsheet*