The Down and Out Co. just issued a dividend of $2.16 per shareon its common stock. The company is expected to maintain a constant5 percent growth rate in its dividends indefinitely. If the stocksells for $50 a share, what is the company's cost of equity?(Do not round your intermediate calculations.)
rev: 09_20_2012
9.32%
9.06%
4.64%
10.01%
9.54%
The Down and Out Co. just issued a dividend of $2.16 per shareon its common stock. The company is expected to maintain a constant5 percent growth rate in its dividends indefinitely. If the stocksells for $50 a share, what is the company's cost of equity?(Do not round your intermediate calculations.) |
rev: 09_20_2012
9.32%
9.06%
4.64%
10.01%
9.54%
Related questions
Modern Building Supply sells various building materials toretail outlets. The company has just approached Linden State Bankrequesting a $300,000 loan to strengthen the Cash account and topay certain pressing short-term obligations. The company'sfinancial statements for the most recent two years follow:
| This Year | Last year | |
| Assets | ||
| Current assets: | ||
| Cash | $63,000 | $135,000 |
| Market securities | 0 | 19,000 |
| Accounts receivable, net | 471,000 | 289,000 |
| Inventory | 935,000 | 597,000 |
| Prepaid expenses | 17,000 | 24,000 |
| Total current assets | 1,486,000 | 1,064,000 |
| Plant and equipment, net | 1,539,810 | 1,445,550 |
| Total assets | $3,025,810 | $2,509,550 |
| Liabilities and Stockholders' Equity | ||
| Liabitities: | ||
| Current liabilities | $812,000 | $438,000 |
| Bonds payable, 10% | 617,000 | 617,000 |
| Total liabilities | 1,429,000 | 1,055,000 |
| Stockholders' equity: | ||
| Pereferred stock, $25 par, 7% | 255,000 | 255,000 |
| Common stock, $10 par | 507,000 | 507,000 |
| Retained earnings | 834,810 | 692,550 |
| Total stockholders' equity | 1,596,810 | 1,454,550 |
| Total liabilities and stockholders equity | $3,025,810 | $2,509,550 |
| This year | Last year | |
| Sales | $5,007,000 | $4,356,000 |
| Cost of goods sold | 3,866,000 | 3,443,000 |
| Gross margin | 1,414,000 | 913,000 |
| Selling and administrative expenses | 635,000 | 539,000 |
| Net operating income | 506,000 | 374,000 |
| Interest expense | 61,700 | 61,700 |
| Net income before taxes | 44,300 | 312,300 |
| Income taxes (40%) | 177,720 | 124,920 |
| Net income | 266,580 | 187,380 |
| Dividends paid: | ||
| Preferred dividends | 17,850 | 17,850 |
| Common dividends | 106,470 | 70,980 |
| Total dividends paid | 124,320 | 88,830 |
| Net income retained | 142,260 | 98,550 |
| Retained earnings, beginning of year | 692,550 | 594,000 |
| Retained earnings, end of year | $834,810 | $692,550 |
During the past year, the company has expanded the number oflines that it carries in order tostimulate sales and increaseprofits. It also moved aggressively to acquire new customers. Salesterms are 2/10, n/30. All sales are on account.
Assumer that the following ratios are typical of companines inthe building supply industry:
| Current ratio | 2.5 |
| Acid-test ratio | 1.2 |
| Average collection period | 18 days |
| Average sale period | 50 days |
| Debt-to-equity ratio | 0.75 |
| Times interest earned ratio | 6.0 |
| Return on total assets | 10% |
| Price-earnings ratio | 9 |
Assume that you have just inherited several hundred shares ofModern Building Supplu stock. Not being acquainted with thecompany, you decide to do some analytical work beofer making adecision about whether to retain or sell the stock you haveinherited.
Required:
1. You decide first to assess the well-being ofthe common stockholders.For both this year and last year, computethe following:
a. The earnings per share (Round your answer to2 decimal places.)
| This year | Last year | |
| Earnings per share | $ ? | $ ? |
b. The dividend yield ratio for common stock.The company's common stock is currently selling for $33.39 pershare; last year it sold for $25.72 per share (Round youintermediate calculations to 2 decimal palces and final answers to1 decimal place.)
| This year | Last year | |
| Dividend yield ratio | ? % | ? % |
c. The dividend payout ratio for common stock(Round you intermediate calculations to 2 decimal places and finalanswers to 1 decimal place.)
| This year | Last year | |
| Dividend payout raito | ? % | ? % |
d. The price-earnings ratio (Round yourintermediate calculations to 2 decimal places and final answers to1 decimal place.)
| This year | Last year | |
| Price-earnings ratio | ? times | ? times |
e. The book value per share of common stock(Round your ansers to 2 decimal places.)
| This year | Last year | |
| Book value per share | $ ? | $ ? |
2. You decide next to assess the compay's rateof return. Compute the following for bothe this year and lastyear:
a. The return on total assets (Total assets atthe beginning of last year were $2,270,000) (Round yourintermediate to whole numbers and final answer to 1 decimalplace)
| This year | Last year | |
| Return on total assets | ? % | ?% |
b.The return on common stockholders' equity.(Stockholders' equity at the beginning of last year was $1,319,000)(Round you intermediate calculations to whole numbers and finalanswer to 1 decimal place.)
| This year | Last year | |
| Return on common stockholders' equity | ?% | ?% |
104.
Buchanan Corp. is refunding $9 million worth of 12% debt. Thenew bonds will be issued for 7%. The corporation's tax rate is 31%.The call premium is 8%. What is the net cost of the callpremium? |
102.
101.
Assume, in assessing the initial P/E ratio, the investmentbanker will first determine the appropriate industry P/E based onthe Standard & Poorâs 500 Index. Then a .50 point will be addedto the P/E ratio for each case in which Richmond Rent-A-Car issuperior to the industry norm, and a .50 point will be deducted foran inferior comparison.
On this basis, what should the initial P/E be for the firm?(Round your answer to 1 decimal place.)
99.
Firm X needs to net $8,000,000 from the sale of common stock.Its investment banker has informed the firm that the retail pricewill be $24 per share, and that the firm will receive $21.00 pershare. Out-of-pocket costs are $600,000. How many shares must besold? |
98.
| Raybac is about to go public. Its present stockholders own580,000 shares. The new public issue will represent 810,000 shares.The shares will be priced at $55 to the public with a 16% spread.The out-of pocket costs will be $570,000. What are the net proceedsto the firm? The investment banking firm of Einstein & Co. will use adividend valuation model to appraise the shares of the ModernPhysics Corporation. Dividends (D1) at the endof the current year will be $1.54. The growth rate (g) is9 percent and the discount rate (Ke)is 13 percent. b. If there is a 5 percent total underwritingspread on the stock, how much will the issuing corporation receive?(Do not round intermediate calculations and round youranswer to 2 decimal places.) c. If the issuing corporation requires a netprice of $37.00 (proceeds to the corporation) and there is a 5percent underwriting spread, what should be the price of the stockto the public? (Do not round intermediate calculations andround your answer to 2 decimal places.) |
You have just been hired as a loan officer at Fairfield StateBank. Your supervisor has given you a file containing a requestfrom Hedrick Company, a manufacturer of auto components, for a$1,000,000 five-year loan. Financial statement data on the companyfor the last two years are given below: |
| Hedrick Company | ||||
| Comparative Balance Sheet | ||||
| This Year | Last Year | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 336,000 | $ | 426,000 |
| Marketablesecurities | 0 | 104,000 | ||
| Accounts receivable,net | 905,000 | 596,000 | ||
| Inventory | 1,390,000 | 860,000 | ||
| Prepaid expenses | 78,000 | 63,000 | ||
| Total currentassets | 2,709,000 | 2,049,000 | ||
| Plant and equipment,net | 3,181,100 | 3,108,300 | ||
| Total assets | $ | 5,890,100 | $ | 5,157,300 |
| Liabilitiesand Stockholders' Equity | ||||
| Liabilities: | ||||
| Current liabilities | $ | 1,260,000 | $ | 800,000 |
| Bonds payable, 10% | 1,160,000 | 1,110,000 | ||
| Totalliabilities | 2,420,000 | 1,910,000 | ||
| Stockholders'equity: | ||||
| Preferred stock, 8%, $30par value | 600,000 | 600,000 | ||
| Common stock, $40 parvalue | 2,000,000 | 2,000,000 | ||
| Retained earnings | 870,100 | 647,300 | ||
| Total stockholders'equity | 3,470,100 | 3,247,300 | ||
| Total liabilitiesand stockholders' equity | $ | 5,890,100 | $ | 5,157,300 |
| Hedrick Company | ||||
| Comparative Income Statement and Reconciliation | ||||
| This Year | Last Year | |||
| Sales (all onaccount) | $ | 5,260,000 | $ | 4,290,000 |
| Cost of goodssold | 4,120,000 | 3,120,000 | ||
| Gross margin | 1,140,000 | 1,170,000 | ||
| Selling andadministrative expenses | 520,000 | 520,000 | ||
| Net operatingincome | 620,000 | 650,000 | ||
| Interestexpense | 116,000 | 111,000 | ||
| Net income beforetaxes | 504,000 | 539,000 | ||
| Income taxes(30%) | 151,200 | 161,700 | ||
| Net income | 352,800 | 377,300 | ||
| Dividends paid: | ||||
| Preferred stock | 48,000 | 48,000 | ||
| Common stock | 82,000 | 41,000 | ||
| Total dividendspaid | 130,000 | 89,000 | ||
| Net incomeretained | 222,800 | 288,300 | ||
| Retained earnings,beginning of year | 647,300 | 359,000 | ||
| Retained earnings,end of year | $ | 870,100 | $ | 647,300 |
Marva Rossen, who just two yearsago was appointed president of Hedrick Company, admits that thecompany has been âinconsistentâ in its performance over the pastseveral years. But Rossen argues that the company has its costsunder control and is now experiencing strong sales growth, asevidenced by the more than 22% increase in sales over the lastyear. Rossen also argues that investors have recognized theimproving situation at Hedrick Company, as shown by the jump in theprice of its common stock from $31 per share last year to $47 pershare this year. Rossen believes that with strong leadership andwith the modernized equipment that the $1,000,000 loan will enablethe company to buy, profits will be even stronger in thefuture. |
Anxious to impress yoursupervisor, you decide to generate all the information you canabout the company. You determine that the following ratios aretypical of companies in Hedrickâs industry: |
| Current ratio | 2.3 | |
| Acid-test ratio | 1.2 | |
| Average collectionperiod | 31 | days |
| Average saleperiod | 60 | days |
| Return onassets | 9.5 | % |
| Debt-to-equityratio | 0.65 | |
| Times interestearned | 5.7 | |
| Price-earningsratio | 10 | |
| Required: |
| 1. | You decide first to assess the rate of return that the companyis generating. Compute the following for both this year and lastyear: |
| a. | The return on total assets. (Total assets at the beginning oflast year were $4,330,000.) (Round your answers to 1decimal place.) |
| This year | Lastyear | |
| Return on totalassets | % | % |
| b. | The return on common stockholdersâ equity. (Stockholders' equityat the beginning of last year totaled $4,974,022. There has been nochange in preferred or common stock over the last twoyears.)(Round your intermediate calculations to wholenumbers and final answer to 1 decimal place) |
| This year | Last year | |
| Return on commonstockholders' equity | % | % |
| c. | Is the companyâs financial leverage positive or negative? |
| This year | (Click toselect)PositiveNegative |
| Last year | (Click toselect)NegativePositive |
| 2. | You decide next to assess the well-being of the commonstockholders. For both this year and last year, compute: |
| a. | The earnings per share. (Round your answers to 2 decimalplaces.) |
| This year | Last year | |
| Earnings pershare | $ | $ |
| b. | The dividend yield ratio for common stock. (Round yourintermediate calculations to 2 decimal places and final answers to1 decimal place.) |
| This year | Last year | |
| Dividend yieldratio | % | % |
| c. | The dividend payout ratio for common stock.(Round your intermediate calculations to 2decimal places and final answers to 1 decimalplace.) |
| This year | Last year | |
| Dividend payoutratio | % | % |
| d. | The price-earnings ratio. (Round your intermediatecalculations to 2 decimal places and final answers to 1 decimalplace.) |
| This year | Last year | |
| Price-earningsratio | times | times |
| e. | The book value per share of common stock. (Round youranswers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Book value pershare | $ | $ |
| f. | The gross margin percentage.(Round your answers to 1decimal place.) |
| This year | Last year | |
| Gross marginpercentage | % | % |
| 3. | You decide, finally, to assess creditor ratios to determine bothshort-term and long-term debt paying ability. For both this yearand last year, compute: |
| a. | Working capital. |
| Thisyear | Lastyear | |
| Working capital | $ | $ |
| b. | The current ratio.(Round your answers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Current ratio | ||
| c. | The acid-test ratio.(Round your answers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Acid-test ratio | ||
| d. | The average collection period. (The accounts receivable at thebeginning of last year totaled $527,000.) (Use 365 days ina year. Round your intermediate calculations to 2 decimal placesand final answers to the nearest whole number.) |
| This year | Last year | |
| Average collectionperiod | days | days |
| e. | The average sale period. (The inventory at the beginning of lastyear totaled $660,000.) (Use 365 days in ayear.Round your intermediate calculations to 2decimal places and final answers to the nearest wholenumber.) |
| This year | Last year | |
| Average saleperiod | days | days |
| f. | The debt-to-equity ratio.(Round your answers to 2 decimal places.) |
| Thisyear | Lastyear | |
| Debt-to-equityratio | ||
| g. | The times interest earned.(Round your answers to 1 decimal place.) |
| Thisyear | Lastyear | |
| Times interestearned | ||
PLEASE SHOW WORK! Need Help in the concepts!
Thank you
