PQR Corporation expects to have earnings this coming year of $3 per share (year 1). It plans to retain all of its earnings for the next two years (year 1 and year 2). For the subsequent two years (year 3 and year 4), the firm will retain 50% of its earnings. It will then retain 20% of its earnings from that point onward. Each year, retained earnings will be invested in new projects with anexpected return of 25% per year. Any earnings that are not retained will be paid out as dividends. Assume PQR's share count remains constant and all earnings growth comes from reinvestment ofretained earnings. 4.1) Project dividends for years 1 to 6. 4.2) If PQR's equity cost of capital is 10%, what price would you estimate for PQR's stock?

For Years 1 and 2, earnings are reinvested, so there are no dividends. Starting Year 3, we'll…

Answered: PQR Corporation expects to have…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You have looked at the current financial statements for J&R Homes, Company. The company has an EBIT of $3,850,000 this year. Depreciation, the increase in net working capital, and capital spending were $275,000, $133,000, and $525,000, respectively. You expect that over the next five years, EBIT will grow at 20 percent per year, depreciation and capital spending will grow at 10 per year, and NWC will grow at 15 per year. The company has $22,500,000 in debt and 430,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.3 percent, indefinitely. The company's WACC is 9.35 percent and the tax rate is 21 percent. What is the price per share of the company's stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. Share price S 226.59
You have looked at the current financial statements for J&R Homes, Company. The company has an EBIT of $5,250,000 this year. Depreciation, the increase in net working capital, and capital spending were $345,000, $175,000, and $595,000, respectively. You expect that over the next five years, EBIT will grow at 15 percent per year, depreciation and capital spending will grow at 20 per year, and NWC will grow at 10 per year. The company has $29,500,000 in debt and 500,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.3 percent, indefinitely. The company's WACC is 9.45 percent and the tax rate is 25 percent. What is the price per share of the company's stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Share price
You have been studying Lucas Corp.’s financial statements. This year, the company has an EBIT of $3.15mil, Depreciation of $295,000, an increase in net working capital of $125,000, and a capital spending of $535,000. You expect that over the next 5 years, EBIT will grow at 15% per year, depreciation and capital spending will grow at 20% per year, and NWC will grow at 10% per year. After year 5, you expect the company’s free cash flow will grow at 3.5% indefinitely. The company has a 21% corporate tax rate and a WACC of 8.9%. a) Compute the free cash flows for the next 5 years. b) Compute the terminal value at the end of year 5. c) What is the company’s enterprise value?
A company plans on purchasing a new piece of equipment in six years. The equipment is expected to cost $200,000. In planning for this purchase, the company will deposit an amount of money into an investment account earning 8% compounded annually. Using an 8% interest rate, the implied annual interest is $200,000 x 0.08 = $16,000. The following information is given: Assuming an annual interest rate of 8% for six years is appropriate, the present value of the deposit is $200,000 x 0.63017 = $126,034. Assuming an annual interest rate of 8% for eight years is appropriate, the present value of the deposit is $200,000 x 0.54027 = $108,054. Assuming an annual interest rate of 6% for eight years is appropriate, the present value of the deposit is $200,000 x 0.62741 = $125,482. How much does this company need to deposit today? $108,054 $126,034 $125,482 $104,000
Aa.67.
Alfa Inc company is targeted for merger. In the present, the revenues of the company are $10 mil and it is forecast that in the next years it will increase by 10% each year. The operating expenses are $8 mil, which are expected to grow with the same growth rate as the revenues. Depreciation is $500,000 and is estimated to increase by $50,000/year. The investment needs (CAPEX) are $200,000 each year, and the short term financing needs (NWC) are estimated at 2% of turnover. The company has $1 mil in net debts, at an interest rate of 4.5%. The risk-free rate for government bonds is 4.5%, the market risk premium is 6% and beta coefficient is 1.5. The D/E ratio is 0.5After the merger, the D/E ratio will be 0.35 taking into account the repayment of loans forecasted by the acquirer. Net debt = 700,000 after the deal b) Will the company record a financial synergy. Compute the value of the synergy. c) $10 mil will be a good price for the deal?
Jacob Inc. is considering a capital expansion project. The initial investment of undertaking this project is $188,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $28,500, $38,780, $58,960, $77,680 and $95,380 respectively. Jacob has a weighted average cost of capital of 18%. Based on Jacob’s weighted average cost of capital, what is the profitability index (PI)of undertaking this project? That is, what is the profitability index if the weighted average cost of capital is used as the discount rate? Shall Jacob undertake the investment project?
An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4 years. Following is a table for the present value of $1 at compound interest: Year 1 2 3 4 12% 0.943 0.909 0.893 0.870 0.890 0.826 0.797 0.756 0.840 0.751 0.712 0.658 0.792 0.683 0.636 0.572 0.747 0.621 0.567 0.497 Following is a table for the present value of an annuity of $1 at compound interest: Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.870 2 1.833 1.736 1.690 1.626 3 2.673 2.487 2.402 2.283 4 3.465 3.170 3.037 2.855 4.212 3.791 3.605 3.353 5 5 6% 10% % 15% What is the investment's internal rate of return?
If a company expects to increase sales by $7,000 per year over a 10-year planning horizon, what will be the cash flows at the end of every year?
The Clayton Manufacturing Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next eight years. The firms CFO anticipates additional earnings before interest, taxes, depreciation, and amortization (EBITDA) from cost savings equal to $220,000 for the first year of operation of the centre; over the next seven years, the firm estimates that this amount will grow at a rate of 6% per year. The system will require an initial investment of $600,000 that will be depreciated over an eight-year period using straight-line depreciation of $75,000 per year and a zero estimated salvage value. The firms tax rate is 35% and the cost of capital for the project is 12%. What is the projects annual free cash flow (FCF) in year 2? A. $169,250 B. $206,784 C. S 186,925 D. $177,830
A capital investment has an initial cost of $566,000. At the end of each of the next 9 years, it is expected to produce cash inflows of $143,000 and cash outflows of $53,000. After 9 years, it is expected to have a residual value of $17,000. Using a discount rate of 7%, what is this investment's net present value?.
Pearl Corp. is expected to have an EBIT of $2,000,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $85,000, and $125,000, respectively. All are expected to grow at 16 percent per year for four years. The company currently has $10,500,000 in debt and 850,000 shares outstanding. At Year 5, you believe that the company's sales will be $14,850,000 and the appropriate price-sales ratio is 2.2. The company’s WACC is 8.5 percent and the tax rate is 22 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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