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 2017/20l 8 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 eanings, 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

Answer 1

(14) The firm pays a dividend of 30 cents on every share

Net Income = $ 160 million, Dividend Paid = 0.3 x 200 = $ 60 million and Retained Earnings = $ 100 million

Initial Equity Value = Shares Issued x Issue Price per Share = 200 x 25 = $ 500 million

Final Equity Value = Inital Equity Value + Retained Earnings = 500 + 100 = $ 600 million

Book Price Per Share = 600 / 200 = $ 3 per share

Market Price Per Share = $ 28

P/B Ratio at the end of 2017 = 28 / 3 ~ 9.3

Hence, the correct option is (d).

(15) Total Assets (at the end of 2017) = Debt Raised + Equity Issued + Retained Earnings = 400 + 500 + 100 = $ 1000 million

Net PPE + Working Capital + Marketable Securities = 1000

450 + 430 + Marketable Securities = 1000

Marketable Securities = $ 120 million

Hence, the correct option is (e).

(16) Gross PPE = $ 500 million and Net PPE = $ 450 million

Annual Depreciation = Accumulated Depreciation (as this is the first year of the firm's operation)

Annual Depreciation = Gross PPE - Net PPE = 500 - 450 = $50 million

Operating Income = EBIT = $ 260 million

EBITDA = EBIT + annual depreciation expense = 260 + 50 = $ 310 million

Hence, the correct option is (e)

(17) EBIT = $ 260 million, Debt Raised = $ 400 million and Interest Rate = 15 %

EBIT = $ 260 million

Less: Interest Expense = 0.15 x 400 = $ 60 million

Profit before tax (PBT) = $ 200 million and Net Income = $ 160 million

Let the tax rate be T

Therefore, 200 x (1-T) = 160

T = 1 - (160/200) = 0.2 or 20 %

Hence, the correct option is (a).

NOTE: Please raise separate queries for solutions to the remaining sub-parts.