The most recent Income Statement for the ABC Company is shown here: Revenues $ 9

Question

The most recent Income Statement for the ABC Company is shown here:

Revenues $ 975,000

Total Costs ($ 712,500)

Net Income $ 262,500

Total Dividends Paid $ 35,625

a. Revenues are forecasted to increase by 10% next year. The Net Profit Margin and Dividend Payout Ratio are expected to remain constant next year. In Excel, forecast the Income Statement (including Net Income and Dividends) for next year. Please show work.

b. If the P/E ratio for the company is forecasted to be 15 next year with the number of shares outstanding is 100,000, then what is the predicted Earnings Per Share (EPS1), predicted Stock Price (P1), and predicted dividends per share (D1) for the Hawk Company next year using the Forecasted Income Statement? Please show work

c. Given your values for part b., what is the Expected Return of the Hawk Company over the coming year next year if the current stock price is $37.00 per share? PLease show work

d. If the Required Return is 8.00%, would you recommend a BUY, SELL, or HOLD on the Hawk Company? Please explain and show work.

Explanation / Answer

RECENT INCOME STATEMENT A Revenue $975,000 B Total cost ($712,500) C Net Income $262,500 D=C/A Net Profit margin 0.269230769 (262500/975000) E Dividend paid $35,625 F=E/C Dividend payout ratio 0.135714286 (35625/262500) a FORECAST FOR NEXT YEAR G=A*(1+0.1) Forecasted revenue $        1,072,500 (975000*1.1): increase by 10% H=D Net Profit margin 0.269230769 I=H*G Net Income $            288,750 J=F Dividend payout ratio 0.135714286 K=J*I Dividends $        39,187.50 FORECASTED INCOME STATEMENT G Revenue $        1,072,500 L=G-I Total cost $         (783,750) I Net Income $            288,750 H Net Profit margin 0.269230769 K Dividends $        39,187.50 b. M Forecasted P/E ratio 15 N Number of shares outstanding 100000 O Predicted Earning per share(EPS1) $                   2.89 (288750/100000) P=M*O Predicted stock price(P1) $                43.31 (2.89*15) c Current Stock Price per share $37 Prediced stock price after one year $43.31 Expected dididend per share $                   0.39 (39187.50/100000) Expected return=(43.31-37+0.39)= $6.70 Expectedv percent of return=(6.7/37)*100 18.11% d Required Returm 8% Recommendation: BUY Expected return is much higher than required return

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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