Problem 5 (PAge192)
Assume D1 = $1.60, Ke =
13 percent, g = 8 percent, the constant growth dividend valuation model.
Problem 10 (Page 193)
Leland Manufacturing Company
anticipates a no constant growth pattern for dividends. Dividends at the end of
year 1 are $4.00 per share and are expected to grow by 20 percent per year
until the end of year 4 (thatâ€™s three years of growth). After year 4, dividends
are expected to grow at 5 percent as far as the company can see into the
future. All dividends are to be discounted back to present at a 13 percent rate
(Ke = 13 percent).
Project dividends for years 1 through 4 (the first year is already given).
Round all values that you compute to two places to the right of the
decimal point throughout this problem.
- b. Find
the present value of the dividends in part a.
Project the dividend for the fifth year (D5).
- d. find the present value of all future
dividends, beginning with the fifth yearâ€™s dividend. The present value you
find will be at the end of the fourth year. Use as follows: P4
= D5/(Ke ? g).
Discount back the value found in part d for four years at 13
- f. Add
together the values from parts b and e to determine the
present value of the stock.
Problem 14 (Page 194)
Mr. Phillips of Southwest Investment Bankers is evaluating the P/E ratio of
Madison Electronics Conveyors (MEC). The firmâ€™s P/E is currently 17. With
earning per share of $2, the stock price is $34.
The average P/E ratio in the electronic conveyor industry is presently 16.
However, MEC has an anticipated growth rate of 18 percent versus an industry
average of 12 percent, so 2 will be added to the industry P/E by Mr. Phillips.
Also, the operating risk associated with MEC is less than that for the industry
because of its long-term contract with American Airlines. For this reason, Mr.
Phillips will add a factor of 1.5 to the industry P/E ratio.
The debt-to-total-assets ratio is not as encouraging. It is 50 percent,
while the industry ratio is 40 percent. In doing his evaluation, Mr. Phillips
decides to subtract a factor of 0.5 from the industry P/E ratio. Other ratios,
including dividend payout, appear to be in line with the industry, so Mr.
Phillips will make no further adjustment along these lines.
However, he is somewhat distressed by the fact that the firm only spent 3
percent of sales on research and development last year, when the industry norm
is 7 percent. For this reason he will subtract a factor of 1.5 from the
industry P/E ratio.
Despite the relatively low research budget, Mr. Sanders observes that the
firm has just hired two of the top executives from a competitor in the
industry. He decides to add a factor of 1 to the industry P/E ratio because of
Determine the P/E ratio for MEC based on Mr. Phillipsâ€™s analysis.
Multiply this times earnings per share, and comment on whether you think
the stock might possibly be under- or overvalued in the marketplace at its
current P/E and price.
Problem 5 (Page 228)
A firm has assets of $1,800,000 and turns
over its assets 2.5 times per year. Return on assets is 20 percent. What is its
profit margin (return on sales)?
Problem 15 (Page 230)
Multi-Corporation has three different operating divisions. Financial
information for each is as follows:
Clothing Appliances Sporting
Net Income (a/t)
Which division provides the highest operating margin?
Which division provides the lowest after-tax profit margin?
Which division has the lowest after-tax return on assets?
Compute net income (after-tax) to sales for the entire corporation.
Compute net income (after-tax) to assets for the entire corporation.
- f. The
vice president of finance suggests the assets in the Appliances division
be sold off for $10 million and redeployed in Sporting Goods. The new $10
million in Sporting Goods will produce the same after-tax return on assets
as the current $8 million in that division. Recompute net income to total
assets for the entire corporation assuming the above suggested change.
Explain why Sporting Goods, which has a lower return on sales than
Appliances, has such a positive effect on return on assets