In: Accounting
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.