1.) Suppose you know that a company\'s stock currently sells for $65 per share a
ID: 2572412 • Letter: 1
Question
1.) Suppose you know that a company's stock currently sells for $65 per share and the required return on the stock is 15%. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) (Show your work)
Current dividend per share? _______
2.) Lotharan Corp. has yearly sales of $29.4 million and costs of $14.7 million. The company's balance sheet shows debt of $55.4 million and cash of $39.4 million. There are 1,960,000 shares outstanding and the industry EV/EBITDA multiple is 8.9.
What is the company's enterprise value? (Do not round intermediate calculations and round your answer to the nearest whole number. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Enterprise Value $____
What is the stock price per share? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) (Show your work)
Stock price $_______
Explanation / Answer
Answer to Question No. 1
Total Return = Dividend Yield + Capital Gain Yield
0.15 = Dividend Yield + Capital Gain Yield
As mentioned, Dividend Yield = Capital Gain Yield
Then 0.15 = Dividend Yield + Dividend Yield
0.15 / 2 = Dividend Yield
Dividend Yield = 0.075
D1 = Dividend Yield * Current Stock Price
D1 = 0.075 * $65
D1 = $4.875
D1 = D0 * (1+g)
4.875 = D0 * ( 1 +0.075)
4.875 / 1.075 = D0
D0 = $4.53
Answer to Question No. 2
EBITDA = Sales – Cost
EBITDA = $29.4 Million - $14.7 Million
EBITDA = $14.7 Million
EV / EBITDA Multiple is 8.9
EV / 14.7 Million = 8.9
Enterprise Value = $130,830,000
Equity Value = Enterprise Value – Debt + Cash
Equity Value = $130,830,000 - $55,400,000 + $39,400,000
Equity Value = $114,830,000
Stock Price per share = Equity Value / No. of Stock outstanding
Stock Price per share = 114,830,000 / 1,960,000
Stock Price per share = $58.59
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