A 1)Working capital requirement = Accounts receivable + Inventories + Prepaid expenses – Accounts payable – Accrued expenses 2) Managerial balance sheets What is the relationship between these ratios and Sentec’s return on equity
(ROE) over the three-year period?
Operating margin = EBIT/Sales
Invested capital turnover = Sales/Invested capital
Return on invested capital = EBIT/Invested capital
Financial multiplier = (EBT/EBIT) Å~ (Invested capital/Owners’ equity)
Tax effect = EAT/EBT
Return on equity = EAT/Owners’ equity
Operating margin = $650/$22,100 = 2.94%
Invested capital turnover = $22,100/$5,730 = 3.86
Return on invested capital = $650/$5,730 = 11.34%
Financial multiplier = ($540/$650) *($5,730/$4,130)…show more content…
is currently $1 per share and is supposed to grow at 10% a year forever. Its share price is $30. What is your best estimate of Divo’s cost of equity? According to the dividend discount model with constant growth expectations: Po=
Therefore, the return expected by the company shareholders, kE, is: Ke=
DIV1 = $1.10 is the dividend expected for next year [$1.00* (1 + 0.10) = $1.10, where 0.10 or 10 percent is the expected growth rate of dividends], P0 = $30 is the current share price, and g = 0.10 is the expected dividends’ growth rate.
Thus: Ke=1.3/30+ 0.1= 0.0366+0.10=0.1366=13.66 percent
D The firm is asking the finance department of FarWest for an estimate of its cost of capital. FarWest can borrow long term at 7%; its corporate tax rate is 40%. Its beta coefficient is 1.05. The rate of interest on government bonds is currently 5.2%, and the market risk premium is 4%. How would you estimate the firm’s weighted average cost of capital (WACC) if its target debt-to-equity ratio is 1.20?
Step 1: Estimate the firm’s after-tax cost of debt. The firm’s after-tax cost of debt, Kd (1 – TC), where Kd is the pretax cost of debt and TC is the corporate tax rate, is KD (1 – TC) = 7%(1 – 0.40) = 4.2%
Step 2: Estimate the firm’s cost of equity based on the data. According to the capital asset pricing model (CAPM), we have: kE = RF + β * (RM – RF) where RF = 5.2 percent is the