Exhibit 1 Balance Sheet Eva Spade Current Assets $5625 Fixed Assets $5625 Total
ID: 2491130 • Letter: E
Question
Exhibit 1 Balance Sheet Eva Spade
Current Assets
$5625
Fixed Assets
$5625
Total Asset
$11250
Current Liabilities
$1500
Long-Term Debt
$2250
Common Stock ($2 par value)
$1500
Retained Earnings
$6000
Total Liability and Equity
$11250
Exhibit 2 Revenue and Earnings Eva Spade
Year
Sales
Net Income
EPS
1994
7,500,000
900,000
1.20
1995
10,312,500
1,267,500
1.69
1996
12,000,000
1,440,000
1.92
1997
18,750,000
2,156,250
2.88
1998
21,375,000
2,250,000
3.00
1999
23,250,000
2,673,750
3.57
2000
27,375,000
3,011,250
4.02
2001
31,875,000
3,225,000
4.30
2002
34,125,000
3,375,000
4.50
2003
38,625,000
3,422,700
4.56
Exhibit 3 Selected Capital Market, Firm& Industry Data
Yield on AAA Corporate Debt
6%
Yield on 10-year U.S Treasury Bonds
5.10%
Historical average return on a broad market
average of common Stock
16%
Dividend payout Ratio (average) for competitors in retail optics and repair
25%
Marginal Tax Rate for Eva Spade’s(recent)
30%
Coupon Rate, Eva Spade’s outstanding long-term debt
7.50%
Remaining term to maturity, Eva Spade’s outstanding long-term debt
6yrs
Dividend payout Ratio, Eva Spade (Recent)
32%
Market price per share, Eva Spade (Recent)
$18.00
1. What are the compound average annual rates of growth for Eva Spade's revenue and net income? How should the firm (eventually) analyze the value if the potential acquisition in light of these numbers?
2. What is Eva Spade's historical (book) cost of equity?
3. What is Eva Spade's historical (book) cost of long-term debt?
4. How do the firm's current liabilities influence the cost of capital calculation?
5. Using the answers for 2-4, what is Eva Spade's historical weighted-average cost of capital or WACC?
Current Assets
$5625
Fixed Assets
$5625
Total Asset
$11250
Current Liabilities
$1500
Long-Term Debt
$2250
Common Stock ($2 par value)
$1500
Retained Earnings
$6000
Total Liability and Equity
$11250
Explanation / Answer
(1)
(a) Compound average growth rate = [(Ending value / Beginning value)]1/Number of years - 1
Number of years = 9
(i) CAGR for revenue = [$38,625,000 / $7,500,000]1/9 - 1 = (5.15)1/9 - 1 = 1.1997 - 1 = 0.1997 = 19.97%
(ii) CAGR for net income = [$3,422,700 / $900,000]1/9 - 1 = (3.803)1/9 - 1 = 1.16 - 1 = 0.16 = 16%
(b) Value of a firm is the present value of all future net earnings discounted at the weighted average cost of capital (WACC). While computing future net earnings, revenues are projected on a growth rate at the CAGR.
(2)
Cost of equity, Ke = Dividend / Book value of equity
= ($3,422,700 x 32%) / $1,500,000 = $1,095,264 / $1,500,000 = 0.73 = 73%
(3)
Book Cost of long-term debt = Coupon rate on long-term debt x (1 - Tax rate) = 7.5% x (1 - 0.3) = 7.5% x 0.7
= 5.25%
Note: First 3 questions are answered.
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