Question

RAYA Corporation sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share of $2.35 in 1993, and expected earnings growth of 15.5% a year from 1994 to 1998, and 6% a year after that. The capital expenditure per share was $2.25, and depreciation was $1.125 per share in 1993. Both are expected to grow at the same rate as earnings from 1994 to 1998. Working capital is expected to remain at 5% of revenues, and revenues which were $1,000 million in 1993 are expected to increase 6% a year from 1994 to 1998, and 4% a year after that. The firm currently has a debt ratio (D/(D+E)) of 5%, but plans to finance future investment needs (including working capital investments) using a debt ratio of 20%. The stock is expected to have a beta of 1.00 for the period of the analysis, and the Treasury bond rate is 6.50%. (There are 63 million shares outstanding.)

A. Assuming that capital expenditures and depreciation offset each other after 1998, estimate the value per share.

B. Assuming that capital expenditures continue to be 200% of depreciation even after 1998, estimate the value per share.

C. What would the value per share have been, if the firm had continued to finance new investments with its old financing mix (5%)? Is it fair to use the same beta for this analysis?

Answer 1

A.

B

C

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