Their new task consisted of determining Entergy Corp.’s value in common stock, preferred stock, and bonds. With this information, they were to prepare a second seminar to explain the valuation process to the clients

Nicholas and Karina were able to obtain the following information in regard to Entergy Corp.’s long term obligations. The table indicates the first three first-mortgage bonds listed in the Annual Report.

Table 1

Nicholas and Karina concluded that the effect of increased concern in regards to any event risk, was to lower Entergy Corp.’s cost of bond financing. The following information was gathered through the use of Value Line Survey.

Entergy’s recent price was $38 per share with a P/E of 14.6 and a dividend yield of 4.8%. Its beta was .60.

Earnings Per Share

Quarterly Dividends Paid Per Share

FMS SECURITIES CASE B - Questions

1.) Entergy Corp. has $54,956,000 of preferred stock outstanding.

a.) Suppose its Series A, which has a $100 par value and pays a 4.32 percent cumulative dividend, currently sells for $48.00 per share. What is its nominal expected rate of return? It’s effective annual rate of return? (Hint: Remember that dividends are paid quarterly. Also, assume that this issue is perpetual.)

b.) Suppose a Series F, with a $100 par value and a 9.75 percent cumulative dividend, has a mandatory sinking fund provision. 60,000 of the 300,000 total shares outstanding must be redeemed annually at par beginning at the end of 2004. If the nominal required rate of return is 8.0 percent, what is the current (January 1, 2004) value per share?

2.) Now consider Entergy Corp.’s common stock. Value Line estimates Entergy Corp.’s 5- year dividend growth rate to be 6.0 percent. Assume that Entergy Corp.’s stock traded on January 1, 2003 for $22.26. Assume for now that the 6.0 percent growth rate is expected to continue indefinitely.

a.) What was Entergy Corp.’s expected rate of return at the beginning of 2003? Value Line estimate Entergy Corp.’s dividends to be $1.80 at the start of 2003.

b.) What was the expected dividend yield and expected capital gains yield on January 1,

2003? Describe the relationship between dividend yield and capital gains yield over time under constant growth assumptions.

3.) What conditions must hold to use the constant growth (Gordon) model? Do many “real world” stocks satisfy the constant growth assumptions?

4.) Suppose you believe that Entergy Corp.’s 6.0 percent dividend growth rate will only hold

5 years. After that, the dividend growth rate will return to Entergy Corp.’s historical 10-year

average of 7.5 percent. Note that D6 = D5 x 1.075. (Use to answer questions 4-8)

a.) What was the value of Entergy Corp.’s stock on January 1, 2003 (the end of 2002), if the required rate of return is 13.5 percent? Remember this value you calculate does

not have to agree with the market value of $22.26.

5.)

a.) What is the expected stock price at the end of 2003 (beginning of 2004) assuming

that the stock is in equilibrium?

b.) What is the expected stock price at the end of 2004 (beginning of 2005) assuming

that the stock is in equilibrium?

6.) What is the expected dividend yield, capital gains yield, and total return for 2003?

Hint: You need the expected January 1, 2003 price to compute.

7.) Suppose Entergy Corp.’s dividend was expected to remain constant at $1.80 for the next 5 years and then grow at a constant 6 percent rate. If the required rate of return is 13.5 percent, would Entergy Corp.’s stock value be higher or lower than your answer in Problem 4?

8.) Entergy Corp.’s stock price was $22.26 at the beginning of 2003. Using the growth rates given in the introduction to this question, what is the stock’s expected rate of

return?

9.) Based on the information provided in Value-Line Tables is the assumed 6 % growth rate reasonable? What has been the trend?

10.) Given Value-Line’s ROE estimated for 2005 through 2007 and at the projected

earnings and dividends per share for the same period.

1. Could those figures be used to develop an estimated long-run “sustainable” growth rate?

2. Does this figure support the 7.5 percent growth rate given in the problem?

Hint: Think of the formula g = br = (Retention ratio)(ROE)

Dataset #2 – Star War Film Data

Description: Weekly domestic box office revenues for the 8 Star War films

Research ‘Question’: Find a ‘best’ linear model to predict Star War revenue/day using the number of theaters, number of weeks since release, film number, and release year.

These are the cash flows.

Use this detail to determine answers to the questions below.

Ray’s Racks is a publicly traded company.  The current stock price is $3.00 per share, and there are 20 million shares outstanding.  The present value of the company’s debt is $40,000,000.  The company has a bond issue outstanding with 6 years to maturity.  The face value is $1,000, the coupon rate is 8% (paid quarterly), and the bond is currently selling for $1,020.  The company’s corporate tax rate is 35% and their beta is 1.41.  The current risk free rate is 5%, and the historic market return is 12%.

NOTE: It is critical that you do not round intermediate calculations. For example, while you may provide the after-tax cost of debt rounded to two decimal places, DO NOT calculate the WACC using rounded numbers. DO NOT calculate the NPV using a WACC that was rounded to two decimal places. These will give you incorrect answers. Provide each answer as requested, but DO NOT round intermediate calculations.

Question 1. What is the weighting to be used for equity in the WACC calculation?

Question 2. What is the weighting to be used for debt in the WACC calculation?

Question 3. What is the project's NPV?

In each problem show all steps of the hypothesis test. If some of the assumptions are not met, note that the results of the test may not be correct and then continue the process of the hypothesis test.

1. The Kyoto Protocol was signed in 1997, and required countries to start reducing their carbon emissions. The protocol became enforceable in February 2005. In 2004, the mean CO2 emission was 4.87 metric tons per capita. Table 7.3.3 contains a random sample of CO2 emissions in 2010 ("CO2 emissions," 2013). Is there enough evidence to show that the mean CO2 emission is lower in 2010 than in 2004? Test at the 1% level. Table #7.3.3: CO2 Emissions (in metric tons per capita) in 2010 (1.36 1.42 5.93 5.36 0.06 9.11 7.32 7.93 6.72 0.78 1.80 0.20 2.27 0.28 5.86 3.46 1.46 0.14 2.62 0.79 7.48 0.86 7.84 2.87 2.45)

2. Table #7.3.7 contains pulse rates after running for 1 minute, collected from females who drink alcohol ("Pulse rates before," 2013). The mean pulse rate after running for 1 minute of females who do not drink is 97 beats per minute. Do the data show that the mean pulse rate of females who do drink alcohol is higher than the mean pulse rate of females who do not drink? Test at the 5% level. Table #7.3.7: Pulse Rates of Woman Who Use Alcohol (176 150 150 115 129 160 120 125 89 132 120 120 68 87 88 72 77 84 92 80 60 67 59 64 88 74 68)

3. Maintaining your balance may get harder as you grow older. A study was conducted to see how steady the elderly is on their feet. They had the subjects stand on a force platform and have them react to a noise. The force platform then measured how much they swayed forward and backward, and the data is in table #7.3.10 ("Maintaining balance while," 2013). Do the data show that the elderly sway more than the mean forward sway of younger people, which is 18.125 mm? Test at the 5% level. Table #7.3.10: Forward/backward Sway (in mm) of Elderly Subjects (19 30 20 19 29 25 21 24 50)

Manic Corporation uses customers served as its measure of activity. During June, the company budgeted for 20,000 customers, but actually served 19,000 customers. The company has provided the following data concerning the formulas used in its budgeting and its actual results for June:

Data used in budgeting:

Actual results for June:

Required: Prepare the company's flexible budget performance report for June. Label each variance as favorable (F) or unfavorable (U).

HB ltd has been experiencing dwindling sales in its business operations due to competitions from other agents dealing in communication equipment. On 1 January 2006, HB Ltd decided to diversify its operations to the information technology (IT) industry by acquiring SL Ltd, a company dealing in the manufacture of IT equipment and software design.

The summarized financial statements of HB Ltd and SL Ltd were as follows:

Income statement for the year ended 30September 2006

Statement of financial position as at 30 September 2006

                                                       10,000        3,600

Total equity and liabilities            45,600        16,000

Additional information:

1. HB ltd acquired 80% of ordinary share capital of SL ltd for sh. 10,280,000 and also acquired half of the 10% debentures in the company.
2. The fair value of the assets of SL Ltd at the date of acquisition were the same as their book values except for plant whose fair value were more by sh. 3.2 million. As at 1 January 2006, the plant had a remaining useful life of four years. SL Ltd depreciates plant on straight line basis on cost.
3. During the post-acquisition period, HB Ltd sold goods to SL Ltd for sh 12 million. These goods had a cost HB Ltd sh 9 million. Subsequently, SL Ltd sold some of the goods purchased from HB at sh 10 million for 15 million.
4. On 30 June 2006, HB Ltd and SL Ltd paid dividends of sh 1000,000 and 500,000 respectively.
5. Included in the account receivables and payables is sh 750,000 being the amount SL Ltd owed HB Ltd.
6. Goodwill is considered to be impaired by 25% as at September 2006. Goodwill impairment is classified as an administrative expense by the group company.

Required

1. Group Income statement for the year ended 30 September 2006.
2. Group Statement of financial position as at 30 September 2006.

5.     In which one of the following lists are ALL items relevant when computing net employment income?

A.    Employee contributions to a registered pension plan; signing bonus on accepting employment; use of an employer-owned automobile.

B.    Monthly automobile allowance; dental plan paid for by the employer; promotional cost incurred in selling the employer’s products.

C.    Subsidized meals in employer’s facilities; life insurance paid by the employer; legal fees incurred to collect unpaid salary.

D.    Tips and gratuities; dental insurance paid by the employer; exercise of options to purchase shares of the publicly traded employer.

Hannah Legaleagle is an attorney. She is an Irish citizen who vacationed in the U.S. for 14 days in 2017. Because of her fondness for living in the U.S., Hannah’s Irish employer law firm, gave her a temporary assignment in the U.S. from August 1 through December 31, 2018. She earned $120,000 while working in the U.S. , earned $220,000 for the year working in Ireland, and she also earned about $40,000 in interest and dividends, all from Irish banks and publicly traded Irish companies.

Hannah asks you to advise her of the U.S. tax consequences for 2018.

John files a return as a single taxpayer. In 2019, he had the following items: ∙ Salary of $30,000. ∙ Loss of $65,000 on the sale of Section 1244 stock acquired two years ago. ∙ Interest income of $6,000. In 2020, John again files a return as a single taxpayer and had the following items: Salary of $114,000 Loss of $55,000 on the sale of Section 1244 stock acquired three years ago. Capital gain of $22,000 on the sale of publicly traded stock purchased one year ago. Determine John’s AGI for 2019 and 2020 (assume these are the only transactions, no other carryovers etc...)