1. At the beginning of its fiscal year 2019, an analyst made the following forecast for...

1. At the beginning of its fiscal year 2019, an analyst made the following forecast for KMG, Inc. (in millions of dollars):

	2018	2019	2020	2021	2022	2023
EPS		3.50	3.20	2.78	2.25	1.71
DPS		1.65	1.55	1.15	1.05	1.12
BPS	8.75

Suppose these numbers were given to you at the end of 2018, as forecasts, when the book value per share was $8.75, as indicated and market price of the stock was $10.50 per share. Use a required return of 9 percent for calculations below. You have to fill in the table below to show your working process.

a. Calculate residual earnings (RE) and return of common equity (ROCE) for each year, 2019–2023.

[5 marks]

b. Value the firm at the end of 2018 under the assumption that the ROCE in 2023 will continue at the same level subsequently.

[3 mark]

c. Based on your estimate, should investors buy the share of this company?

[2 mark]

	2018	2019	2020	2021	2022	2023
EPS
DPS
BPS
ROCE
RE
Discount rate
Present value of RE
Total present value of RE to 2023
CV
Present value of CV

Expert Solution

Happy Learning!

jeff jeffy answered 1 year ago

At the beginning of its fiscal year 2019, an analyst made the following forecast for GM,...

At the beginning of its fiscal year 2019, an analyst made the following forecast for GM, Inc. (in millions of dollars): 2019 2020 2021 2022 Cash flow from operation $1,035 $3,180 $3,155 $2,120 Cash investment 425 480 445 820 GM did not have any short-term and long-term debt at the beginning of 2019. Assume that free cash flow will grow at 5 percent per year in 2023 and 2024, after that this will grow at 4 percent per year. GM...

1. At the beginning of its fiscal year 2020, an analyst made the following forecast for...

1. At the beginning of its fiscal year 2020, an analyst made the following forecast for Greenfield, Inc. (in millions of dollars): 2020 2021 2022 2023 Cash flow from operation $1,234 $2,568 $3,755 $2,100 Cash investment 428 489 502 756 Greenfield has a net debt of $1,950 at the end of 2019. Assume that free cash flow will grow at 4 percent per year in 2024 and 2025, after that this will grow at 5 percent per year. Greenfield had...

At the beginning of its fiscal year 2020, an analyst made the following forecast for ABC,...

At the beginning of its fiscal year 2020, an analyst made the following forecast for ABC, Inc. (in millions of dollars): 2019 2020 2021 2022 2023 2024 Earnings 320 350 245 321 220 Dividends 150 120 98 105 86 Book value 890 Suppose these numbers were given to you at the end of 2019, as forecasts, when the book value was 890 million, as indicated and market price of the stock was $10.5 per share. Use a required return of...

At the end of its fiscal year 2019, an analyst made the following forecast for ABC,...

At the end of its fiscal year 2019, an analyst made the following forecast for ABC, Inc. (in millions of dollars): 2020 2021 2022 2023 Cash flow from operation $1,035 $3,180 $3,155 $2,120 Cash investment 425 480 445 820 ABC has a net debt of $823. Assume that free cash flow will grow at 4 percent per year after 2023. ABC had 300 million shares outstanding at the end of 2019, trading at $75 per share. Using a required return...

Paradise Corporation budgets on an annual basis for its fiscal year. The following beginning and ending...

Paradise Corporation budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for next year. Beginning Inventory Ending Inventory Raw material* 56,000 66,000 Finished goods 96,000 66,000 *Three pounds of raw material are needed to produce each unit of finished product. If Paradise Corporation plans to sell 560,000 units during next year, the number of units it would have to manufacture during the year would be: 504,000 units...

Keener Company budgets on an annual basis for its fiscal year. The following beginning and ending...

Keener Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 2020 through June 30, 2021. July 1 2020 June 30 2021 Raw material 40,000 10,000 Work-in process 8,000 8,000 finished goods 30,000 5,000 Three (3) units of raw material are needed to produce each unit of finished product. If 450,000 finished units were to be manufactured during the 2020-2021 fiscal year...

The following are the sales forecast of Avril Furniture Company for the upcoming fiscal year: Year...

The following are the sales forecast of Avril Furniture Company for the upcoming fiscal year: Year 2 Year 3 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Budgeted unit sales 10,000 16,000 15,000 23,000 30,000 Past experience has shown that the ending inventory for each quarter should be equal to 10% of the next quarter’s sales in units. The company expect to start the first quarter with 4,000 units. Two pounds of material A are required for each...

On July 1, 2019, the first day of its 2020 fiscal year, the Town of Bear...

On July 1, 2019, the first day of its 2020 fiscal year, the Town of Bear Creek issued at par $4,200,000 of 8 percent term bonds to renovate a historic wing of its main administrative building. The bonds mature in five years on July 1, 2024. Interest is payable semiannually on January 1 and July 1. As illustrated in the table below, a sinking fund is to be established with equal semiannual additions made on June 30 and December 31....

Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning...

Fact Pattern: Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30: July 1 June 30 Direct material* 40,000 50,000 Work-in-process 10,000 20,000 Finished goods 80,000 50,000 * Two units of direct material are needed to produce each unit of finished product. Question If 500,000 complete units were to be manufactured during the fiscal year by Paradise Company,...

At the beginning of its first year of operations on January 1, 2019, Blue Company’s accounts...

At the beginning of its first year of operations on January 1, 2019, Blue Company’s accounts show the following. Mohammed 160,000 SR Ali 80,000 SR Khalid 50,000 SR The net income or net loss for 2019 has not been closed to the partners’ capital accounts. Required: Journalize the entry to record the division of net income for 2019 under each of the following independent assumptions (you can prepare a schedule showing the distribution of net income to help you in...

Question