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Question 1 Amy Nelson, CFA, has collected the following data about the firm: EBITDA = $3.5...

Question 1 Amy Nelson, CFA, has collected the following data about the firm:

EBITDA = $3.5 million

Tax rate = 38%

Debt outstanding = $2.5 million

Cost of debt = 10.5%

Cost of common equity = 14%

Shares of stock outstanding = 1,000,000

BV of the stock per share = $12

The firm’s product market is considered stable, and the firm expects no growth, and all earnings are paid out as dividends. Calculate the firm’s net income and EPS, assuming depreciation & amortization costs of $500,000 per year. Show your calculations (5 points).

Question 2 Company A has come out with a new and improved product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of 0.3. Its earning this year will be $2 per share. Investors expect a 12% rate of return on the security. At what price and P/E ratio would you expect the firm to sell? (5 points)

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