Question

Use the following information about Company X to help answer questions 14-20:

Company X went public at the start of 2017. At the time of the IPO the company:  Issued 200M shares of stock at $25 per share (thus raising $500M in equity)  Issued $400M of long term debt; as part of this interest only loan, the company agreed to pay creditors 15.0% per year; this implies the current portion of long term debt is $0 in 2017/2018

At the end of 2017, Company X issued financial statements. A complete summary is below:  $400M in sales, $260M in operating earnings, and $160 in net income  $500M Gross PPE , $450 Net PPE  Working Capital of $430, excluding marketable securities  The company paid a dividend of 30 cents per share  Investors were pleased with the results; Company X’s share price closed at $28 per share

At the end of 2018, Company X issued financial statements. A complete summary is below:  $480M in sales, $300M in operating earnings, and $200 in net income  $600M Gross PPE , $490 Net PPE  Working Capital of $460, excluding marketable securities  The company paid a dividend of 40 cents per share  Investors were pleased with the results; Company X’s share price closed at $33 per share

Throughout 2017 and 2018:  The company did not issue or repurchase any shares of stock other than during the IPO  The company did not issue or retire any long term debt other than during the initial debt offering

14. At the end of 2017, Company X’s P/B multiple was closest to:

a. 7.8

b. 8.0

c. 8.3

d. 9.3

e. 10.0

15. At the end of 2017, Company X’s reported marketable securities closest to:

a. $190

b. $150

c. $140

d. $130

e. $120

16. At the end of 2017, Company X reported EBITDA closest to:

a. $430

b. $420

c. $360

d. $320

e. $310

17. At the end of 2017, Company X’s effective tax was closest to:

a. 20%

b. 23%

c. 25%

d. 27%

e. 33%

Answer 1

14. d. 9.3

Retained earnings at the end of 2017 = Net Income - Dividends = $ 160 M - ( 200 M x $ 0.30) = $ 100 M

Book Value of Equity at the end of 2017 = $ 500 M + $ 100 M = $ 600 M

Book value per share = $ 600 M / 200 M = $ 3 per share

Market price per share = $ 28

P/B multiple = $ 28 / $ 3 = 9.3

15. e. $ 120

Total assets = Total Liabilities + Stockholders Equity = $ 400 M + $ 600 M = $ 1,000 M

Marketable Securities = Total Assets - PPE, net - Working Capital = $ 1,000 M - 450 M - 430 M = $ 120 M

16. e. $ 310

Depreciation expense for 2017 = Gross PPE - Net PPE = $ 500 M - $ 450 M = $ 50 M

EBITDA = Operating Earnings + Depreciation Expense = $ 260 M + $ 50 M = $ 310 M

17. a. 20 %

Tax expense for 2017 = Operating Earnings - Interest Expense - Net Income = $ 260 M - $ ( 400 M x 15 %) - $ 160 M = $ 40 M

Effective tax rate = $ 40 M / $ ( 260 - 60) M * 100 = 20 %