Question

You just started a new job as a Finance Manager at XYZ Corp. As you are starting to get acquainted with the company,you requested the Balance Sheet for the Fiscal Year 2018, the Income Statement and a few other items that you deemed appropriate. You can find all of those in the table below and in the Excel file attached. Income Statement for Fiscal Year 2018 Sales COGS Other expenses Depreciation EBIT Interest Taxable income rases (40%) Net income $43,000,000 $30,000,000 $5,000,000 2,000,000 $6,000,000 2,000,000 $4,000,000 $1,600,000 $2,400,000 $600,000 1,800,000 Dividends Add to RE Balance Sheet, Fiscal Year 2018 Liabilities & Owners' Equity Assets Current Assets Current Liabilities Accounts Payable 1,000,000 Cash $500,000 Accounts Receivable $1,000,000 $2,000,000 3,500,000 Notes Pavable Total CL Long Tem Debt Owners Eguuty $3,000,000 $4,000,000 $10,000,000 InventoIy Total CA Fixed Assets Net PP&E Common Stock $6,500,000 Retained Eanings 8,000,000 Total Equity 14500,000 $28,500,000 $25,000,000 Total Assets $28,500,000 Total L &OE Additional in formation 40% Market-to-Book Ratio 125 axes Shares Outs tanding 1,000,000 Note: The Market to Boolk Ratio is equalto the Market Value per Share divided by the Book Value per Share. The BookValue per Share is the Total OwnerEquity divided bythe number ofoutstanding shares This and other financial statements ratios can be found on Chapter 3 in the textbook

Question 3. The quarterly investors call is approaching and you were asked to comment on the EPS and projected EPS based on the growth forecast of 10%.

1. Compute the EPS for the FY 2018

2. What is the projected EPS with the same assumptions as in Question 1?

You are a bit skeptical of the projected 10% growth in sales and decided to look at a much less aggressive long-run growth scenario of 3.5% growth in sales.

3. What is the projected EPS for a 3.5% growth in sales? If the dividend payout ratio remains the same, how much is paid per share?

As some external financing will be needed to accommodate any growth, you started looking into raising debt and/or equity. Since your company would be mostly described as a small- cap US company, you looked at market data to help you determine your costs of equity and debt.

4. Using the information on slide 8 on the deck from Week 4, what should be the risk premium for appropriate market for your company? Assume the risk free is given by 1mo Treasury Bills.
5. Looking at historical stock market data, you determined that your beta is roughly 1.4 with respect to the market benchmark you used above to compute the risk premium. What should your cost of equity be?
6. In order to get a little more comfortable with the number computed above, you decided to look at the cost of equity using the dividend growth corresponding to the 3.5% growth scenario from (c). What is the cost of equity using this approach?

In order to determine your cost of debt, you decided to look at your long term debt, which is structured as a single 20yr bond with semi-annual coupons, a coupon rate of 10%, and is currently trading at 83%.

7. What is your cost of debt?

8. What is your after-tax cost of debt?

Your CEO is interested in knowing what is the minimum return the company should generate to make sure investors are satisfied, but is not sure which number to focus on.

1. What measure should you propose and how would you explain it to your CEO?

10. What is the value for the proposed measure?

Answer 1

A) EPS = Profit available for equity shareholder ÷ No. Of equity shares.

= $ 2,400,000 ÷ 1,000,000 = $ 2.40

B) projected Income Statement with 10% growth

Taxable income = Sale $ 47,300,000 - cogs $ 33,000,000 - other expense $ 5,000,000 - depreciation $ 2,000,000 - interest $ 2,000,000

Taxable income = $ 5,300,000

Less taxes = $ 2,120,000

Profit available for distribution to equity shareholders = $ 3,180,000

Projected EPS = 3,180,000 ÷ 1,000,000 = 3.18

C) Taxable income = $ 44,505,000 - $ 31,050,000 - $ 5,000,000 - $ 2,000,000 - $ 2,000,000 = $ 4,455,000

Less taxes = $ 1,782,000

Profit available = $ 2,673,000

PROJECTED EPS = 2.673

Existing Dividend payout ratio = $ 600,000 ÷ $ 2,400,000 ×100 = 25%

Proposed dividend per share = $ 2,673,000 * 25% / 1,000,000 = $ 0.66825

Answer to other parts not possible as slide 8 is not available.