The following are selected financial information on Firm A and Firm B. You are a

Question

The following are selected financial information on Firm A and Firm B. You are asked to complete the table by methodically calculating the missing information.

You will assume that Cost of Goods Sold (COGS) is 65% of Sales and that the company uses a marginal tax rate of 35%.

Firm AFirm B

Revenue$   3,000$ 3,000

COGS(Blank)(Blank)

Gross Profit1,0501,050

Operating Expense. (300)(300)

EBIT 750750

Interest Expense(Blank)(Blank)

EBT.   (Blank)(Blank)

Income Tax @35%. (Blank)(Blank)

Net Income$488$472

Earnings per share. (Blank)(Blank)

Dividends per share.(Blank)(Blank)

Expected Return on Equity(Blank)(Blank)

Estimated Share Price(Blank)(Blank)

Market Value of Equity(Blank)(Blank)

Market Value of Debt(Blank)(Blank)

Enterprise Value$2,181$2,503

Outstanding Debt$ -$300

Shares Outstanding. 600300

Cost of Debt6%8%

Beta   1.401.70

Expected return on Market. 9%9%

Dividend pay-out ratio 50%60%

Dividend growth. 2%2%

Risk free   3%3%

Common equity $600$300

Company’s debt trading @n/a105

Explanation / Answer

488/600

=$ .81

472/300

=$1.57

Dividend = 488*.50 =244

=244/600

=$.41 per share

Dividend =472*.60 = 283.20

Dividend per share =283.2/300

=$ .944 per share

3+1.40(9-3)

=11.40%

3+ 1.70(9-3)

=13.20%

.944/.132= $ 7.152 per share

FIRM A B cost of goods sold (65% of sales) 1.950    [3000.65] 1,950      [3000*.65] Interest [debt outstanding *rate of debt] - 24           [300*.08] EBT =[EBIT-Interest] 750      [750-0] 726         [750-24] Income tax (35% of EBT) 262 254 Earning per share = Net income / Number of common shares

488/600

=$ .81

472/300

=$1.57

Dividend per share =Dividend/number of shares

Dividend = 488*.50 =244

=244/600

=$.41 per share

Dividend =472*.60 = 283.20

Dividend per share =283.2/300

=$ .944 per share

Expected return on equity =RF+beta(Rm-Rf)

3+1.40(9-3)

=11.40%

3+ 1.70(9-3)

=13.20%

Estimated share price .41 / .114 = $ 3.596 per share

.944/.132= $ 7.152 per share

Markket value of equity 2,157         [3.596*600] 2146      [7.152*300] Market value of debt - 315      [300*105/100]

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