Question 3: the newspaper reported last week that Little Sheep earned $28 million this year. Sales revenue is $350 million. The company current has an asset turnover ratio of 0.5, and a total equity of $186.667 million. Little Sheep declares that it will pay out 30% of their earnings as dividends. The company has 2 million common shares outstanding. The required rate of return is 12%
Answer of Part a:
Profit Margin = Profit / Sales * 100
Profit Margin = $28 million / $350 million * 100
Profit Margin = 8%
Answer of Part b:
Asset Turnover Ratio = Sales / Total Assets
0.50 = $350 million / Total Assets
Total Assets = $700 million
Equity Multiplier = Total Assets / Total Equity
Equity Multiplier = $700 million / $186.667 million
Equity Multiplier = 3.75
Answer of Part c:
Return on Equity = Profit Margin * Asset Turnover Ratio * Equity
Multiplier
Return on Equity = 8.00% * 0.50 * 3.75
Return on Equity = 15.00%
Answer of Part d:
Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.30
Retention Ratio = 0.70
Growth Rate = Return on Equity * Retention Ratio
Growth Rate = 15.00% * 0.70
Growth Rate = 10.50%
Next Year Earnings = This Year Earnings * (1 + Growth
Rate)
Next Year Earnings = $28 million * 1.1050
Next Year Earnings = $30.94 million
Next Year Earnings per share = Next Year Earnings / Shares
Outstaning
Next Year Earnings per share = $30.94 million / 2 million
Next Year Earnings per share = $15.47
Question 3: the newspaper reported last week that Little Sheep earned $28 million this year. Sales...
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