Question

In: Accounting

2009 2010 Sales ($ millions) 1000 1112 Cost of Goods Sold ($ millions) 500 556 Other...

2009

2010

Sales ($ millions)

1000

1112

Cost of Goods Sold ($ millions)

500

556

Other Expenses ($ millions)

100

111

Depreciation ($ millions)

100

Interest Expense ($ millions)

50

55

Total Current Assets ($ millions)

600

700

Total Fixed Assets ($ millions)

2200

2500

Accumulated Depreciation ($ millions)

400

This can be determined from the information given

Net Fixed Assets ($ millions)

1800

2000

Total Current Liabilities ($ millions)

450

550

Long-term Liabilities ($ millions)

900

975

Common Stock ($ millions)

500

This can be determined from the information given

• The firm’s plowback ratio (this ratio is also called the retention ratio and the reinvestment rate) is 60%

• The firm’s tax rate is 40%

• The required return on the company’s stock is 10%

1. Construct the firm’s income statements and balance sheets for 2009 and 2010.

2. Calculate the firm’s cash flows (OCF, NCS, change in NWC, CFC, CFS, and FCF) for 2010. Assume all values are year-end values.

3. Calculate the company’s internal growth rate (IGR) and sustainable growth rate (SGR).

4. Use the SGR to forecast three years of financial statements. List all assumptions made to create the forecasts. Use long-term debt as the plug.

5. Use the internal growth rate (IGR) as a permanent growth rate in dividends and estimate the stock price using the single-stage dividend growth model. Use the financial data to find the current dividend per share. There are 3 million shares outstanding. What does the dividend growth model predict the stock price to be? How does the required return break down into its income (DY) and price (CGY) components?

6. If the actual stock price is $50, which of the following might be a valid reason for the large discrepancy between the predicted stock price from above and the actual stock price of $35?

a. The market expects the company to grow at a faster rate than the internal growth rate.

b. The market expects the company to grow at a slower rate than the internal growth rate.

c. The market requires a higher return than the 10% you used to find the stock price?

d. The company is doing very poorly.

e. The company is doing very well.

Expert Solution

1) Firm’s Income Statement for the Year 2009 and 2010

2) Calculation the firm’s cash flows (OCF, NCS, change in NWC, CFC, CFS, and FCF) for 2010. Assume all values are year-end values.

3) Company’s Internal Growth Rate and Sustainable Growth Rate

Internal Growth Rate = Return on Assets*Retention Ratio/ 1-(= Return on Assets*Retention Ratio)

For Year 2010= 10.74*60%/1-(10.74*60%) = 1.18

For Year 2009= 10.42*60%/1-(10.42*60%) = 1.19

Sustainable Growth Rate = Return on Equity*Retention Ratio

For Year 2010= 25.06*60%= 15.04%

For Year 2009= 25.42*60%= 15.25%

Workings:-

Return on Assets= Operating Income/ Total Assets

For Year 2010= 290/2700 = 10.74%

For Year 2009= 250/2400 = 10.42%

Retention Ratio = Retained Earnings/ Net Income

For Year 2010= 104.40/174 = 60%

For Year 2009= 90/150 = 60%

Return on Equity= Net Income/ Shareholder’s Equity

For Year 2010= 174/694.40= 25.06%

For Year 2009= 150/590= 25.42%

6) If the actual stock price is $50, which of the following might be a valid reason for the large discrepancy between the predicted stock price from above and the actual stock price of $35?

Answer: a.) The market expects the company to grow at a faster rate than the internal growth rate.

ekkarill92 answered 2 years ago

2010 2009 Sales $ 4,400 $ 3,760 Cost of goods sold 2,500 2,750

2010 2009 Sales $ 4,400 $ 3,760 Cost of goods sold 2,500 2,750 Gross margin 1,900 1,010 Operating expenses 750 380 Operating income 1,150 630 Interest expense 250 130 Income before taxes 900 500 Income taxes (25%) 225 125 Net income $ 675 $ 375 a. In a common-size analysis, what percentage would you show for Income taxes for 2010? 5.50% -5.60% 18.50% 5.11% b. In...

The information below will be needed to answer all questions. 2009 2010 Sales ($ millions) 1000...

The information below will be needed to answer all questions. 2009 2010 Sales ($ millions) 1000 1112 Cost of Goods Sold ($ millions) 500 556 Other Expenses ($ millions) 100 111 Depreciation ($ millions) 100 100 Interest Expense ($ millions) 50 55 Total Current Assets ($ millions) 600 700 Total Fixed Assets ($ millions) 2200 2500 Accumulated Depreciation ($ millions) 400 This can be determined from the information given Net Fixed Assets ($ millions) 1800 2000 Total Current Liabilities ($...

Nabors Inc. 2009 Income Statement ($ in millions) Bet Sales $9,610 Less: Cost of Goods Sold...

Nabors Inc. 2009 Income Statement ($ in millions) Bet Sales $9,610 Less: Cost of Goods Sold 6,310 Less Depreciation 1,370 Earnings before interest and taxes 1,930 Less: Interest paid 630 Taxable income $1,300 Less taxes 455 Net Income $ 845 Nabors Inc. 2008 and 2009 Balance sheets ($ in millions) 2008 2009 2008 2009 Cash $310 $405 Accounts Pay $2720 $2570 Accounts Rec. 2640 3055 Notes Pay 100 0 Inventory 3275 3850 Total $2820 $2570 Total $6225 $7310 Long Term...

Figures are in millions of dollars Net sales $ 2,473.8 Cost of goods sold (COGS) $...

Figures are in millions of dollars Net sales $ 2,473.8 Cost of goods sold (COGS) $ 1,316.2 Operating expenses (S&GA) $ 575.8 Inventory $ 250.1 Accounts receivable $ 36.7 Other current assets $ 68.9 Fixed assets $ 690.0 What's the net profit margin? $____ Show work. What's the net profit margin %? _____ Show work. What's the value of total assets? $____ Show work. What's the asset turnover ? $____ Show work. What's the return on assets (ROA)? $____ Show...

S&S Air, INC. 2009 Income Statement Sales $30,499,420 Cost of goods sold $22,224,580 Other expenses $3,867,500...

S&S Air, INC. 2009 Income Statement Sales $30,499,420 Cost of goods sold $22,224,580 Other expenses $3,867,500 Depreciation $1,366,680 EBIT $3,040,660 Interest $478,240 Taxable income $2,562,420 Taxes (40%) $1,024,968 Net income $1,537,452 Dividends $560,000 Add to retained earnings $977,452 S&S Air, INC. 2009 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash $441,000 Accounts payable $889,000 Accounts receivable $708,400 Notes payable $2,030,000 Inventory $1,037,120 Total current liabilities $2,919,000 Total current assets $2,186,520 Long term debt $5,320,000 Fixed...

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 8,700 Cost of goods sold...

Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 8,700 Cost of goods sold 7,340 Depreciation 405 Earnings before interest and taxes $ 955 Interest paid 82 Taxable income $ 873 Taxes 306 Net income $ 567 Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions) 2016 2017 2016 2017 Cash $ 150 $ 185 Accounts payable $ 1,180 $ 1,260 Accounts rec. 920 730 Long-term debt 1,000 1,265 Inventory 1,520 1,550 Common stock 3,210 2,900...

During 2009, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling...

During 2009, Raines Umbrella Corp. had sales of $740,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $574,000, $89,000, and $128,000, respectively. In addition, the company had an interest expense of $100,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. paid out $19,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued...

IMT Co. reported the following selected information for 2010: Sales revenue .......................................................................................... $865,000 Cost of goods sold......................................

IMT Co. reported the following selected information for 2010: Sales revenue .......................................................................................... $865,000 Cost of goods sold.................................................................................. 360,000 Depreciation expense ............................................................................. 43,000 Salaries & wages expense ……………………………………………... 178,000 Rent Expense ………………………………………………………….. 95,000 Beginning of Year End of Year Accounts receivable ..................................... $ 15,000 $ 35,000 Prepaid rent ................................................... 21,000 15,000 Salaries & wages payable ............................. 33,000 18,000 Required:Use the above information to calculate: The cash collected from customers ii)The cash paid for depreciation iii)The cash paid to employees iv)The cash paid for rent

Phillipe Corporation 2015 Income Statement In Millions of Dolars Sales 4053 Cost of Goods Sold 2780...

Phillipe Corporation 2015 Income Statement In Millions of Dolars Sales 4053 Cost of Goods Sold 2780 Depreciation 550 Earnings Before Interest and Taxes 723 Interest Paid 502 Taxable Income 221 Taxes (34%) 75 Net Income 146 Dividends 47 Addition to Retained Earnings 99 Philippe Corporation 2014 and 2015 Balance Sheets In Millions of Dollars 2014 2015 Assets Current Assets Cash 210 215 Accounts Receivable 355 310 Inventory 507 328 Total 1072 853 Fixed Assets Net Plant and Equipment 6085 6527...

The following partial information is available for company Z: Sales $5000 Cost of goods sold $500...

The following partial information is available for company Z: Sales $5000 Cost of goods sold $500 Salary expense $300 Unearned revenue (customer advance ) $200 Interest income $100 Gross profit would be: