Question

1. What dividend yield would be reported in two years in the financial press for a stock that currently pays a $1.50 dividend per quarter, has a return on equity of 18% and earnings per share of $7.75 and a projected stock price in two years of $40?

A. 15%. B. 16.5% C. 16.2% D. 4%.

2. Allen Co. has the following data for 2017, Sales of $50 million, Net Profit Margin of 10%, an- nual Depreciation of $1.5 million, projected Capital Expenditures of $1 million, projected Working Capital investment of $1.1 million and an inflation rate of 3%? The firm has no debt and you are an analyst preparing a five-year free cash flow pro forma and the free cash flow in year 2019 of the pro forma is?

A. $4.532 million. B. $4.667 million. C. $ 2.90 million. D. $3.07 million.

Answer 1

Q. 1). Answer :- Option A). 15 %.

Explanation :- Dividend in Year 3 = Dividend per quarter * Number of quarters in year.

= 1.50 * 4

= $ 6.

Dividend Yield in two years = Dividend in Year 3 / Price of stock in Year 2

= 6 / 40

= 0.15 i.e., 15 % (0.15 * 100).

Conclusion :- Dividend Yield in two years = 15 % (Option A).

Q. 2). Answer :- Option B). $ 4.667 Million.

Explanation :- Net income in Year 2017 = Net profit margin * Sales of Year 2017

= 10 % * 50 Million

= $ 5 Million.

Free cash flow in Year 2017 = Net income + Depreciation - Capital expenditure - Working capital investment.

= 5 Million + 1.50 Million - 1 Million - 1.1 Million

= 4.4 Million.

Free cash flow in Year 2018 = Free cash flow in Year 2017 * (1 + inflation rate).

= 4.4 Million * (1 + 0.03)

= 4.4 Million * 1.03

= 4.532 Million.

Free cash flow in Year 2019 = Free cash flow in Year 2018 * (1 + inflation rate).

= 4.532 Million * (1 + 0.03)

= 4.532 Million * 1.03

= 4.667 Million. (Option B).

Conclusion :- Free cash flow in Year 2019 = $ 4.667 Million (Option B).