Question

Calculate the current price per share (P0) for Olson Corporation, given the following information. The data all pertain to the year just ended.

           Sales                                      = 100,000 units

           Sales price per unit                      = $100.00

           Variable cost per unit                     = $70.00

           Fixed cost                                   = $100,000

           Debt outstanding                         = $500,000

           Interest rate on debt                  = 10 percent

           Tax Rate                                    = 40 percent

           Common stock shares

                      outstanding                        = 100,000 shares

           Beta                                              = 1.2

           kRF                                            = 2 percent

           kM                                                = 8 percent

           Pay-out ratio                                = 30 percent

           Growth rate in earnings

                      and dividends                   = 4 percent

		$ 98.65
		$342.00
		$ 68.40
		$102.60
		$133.38

5 points   

Answer 1

- Preparing the Income Statement to determine the Dividend just ended:-

Particular	Explanation	Amount in $
Sales	[$100*100,0000]	10,000,000.00
Less: COGS	[$70*100,0000]	(7,000,000.00)
Fixed Costs		(100,000.00)
EBIT		2,900,000.00
Interest Expenses	[$500,000*10%]	(50,000.00)
Earning before tax		2,850,000.00
Taxes @40%		(1,140,000.00)
Net Income		1,710,000.00

- Dividend Payout ratio = 30%

- Dividend = Net Income*Dividend Payout ratio

=$1710,000*30%

=$513,000

- Dividend per share(D0) = Dividend/No of shares Outstanding

=$513,000/100,000 shares

= $5.13 per share

- Growth rate in Dividends (g) =4%

As per CAPM,

Rf = Risk free Return = 2%

Rm = Market return = 8%

Beta = 1.2

Required rate of Return(Ke) = 2% + 1.2(8% - 2%)

= 9.2%

Calculating the Current Price per share(P0):-

P0 = $ 102.6 per share

So, the current price per share (P0) for Olson Corporation is $102.6 per share

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