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 COGS is 65% of net sales and that the company uses a marginal income tax rate of 35%.

firm A    firm B

net sales $5000 5000

COGS   

Gross profit 1750 1750

operating expenses (300) (300)

EBIT 1450 1450

Interest Expensse

EBT

income Tax @35%

Net income 942 927

Earning per share

Dividend per share

Expected return on equity

Estimated share price

Market value of debt

Enterprise value 6691 5976

EBITDA

Free cash flow

share outstanding 600 300

cost of debt 6% 8%

Beta 1.20 1.50

Expected return on market 8% 8%

Dividend pay-out ratio 40% 40%

Dividend growth 3% 3%

Risk free 4% 4%

Debt outstanding (book value) $- $500

Common equity (book value) $600 $300

company's debt trading @ n/a 104

change in working capital $(30) $(25)

capital expenditure $(40) $(45)

Depreciation expense $20 $20

Explanation / Answer

Details Firm A Firm B Remarks net sales 5000              5,000              5,000 COGS              (3,250)            (3,250) 65% of net sales Gross profit                    1,750              1,750 operating expenses               (300)               (300) EBIT                 1,450              1,450 Interest Expensse                     -                      24 EBT              1,450              1,426 net income/65% income Tax @35%                 508                  499 Net income                 942                  927 Earning per share                1.57                3.09 Dividend per share              0.628              1.236 =net income*E893%/Outstanding shares Expected return on equity 8.80% 10.00% Return =Risk free rate +Beta*(Market return rate-Risk free rate) Estimated share price           11.188              18.25 P0=d0(1+g)/(k-g) as per Gordon's formula Market value of debt                     -                    398 Enterprise value-Mkt vale shares -trading debt Enterprise value              6,691              5,976 EBITDA              1,470              1,470 EBIT + depreciation Free cash flow                 892                  877 =net income+depreciation+ change in wc+capital expenditure share outstanding                    600                  300 cost of debt 6% 8% Beta                1.20                1.50 Expected return on market    8% 8% Dividend pay-out ratio    40% 40% Dividend growth    3% 3% Risk free 4% 4% Debt outstanding (book value) $-                  500 Common equity (book value)                 600                  300 company's debt trading @                  104 change in working capital                    (30)                  (25) capital expenditure                 (40)                  (45) Depreciation expense $20 $20                    20                    20

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.