Debt and price-earnings ratios Alphabet (formerly known as Google) (GOOG) is a technology company that offers users Internet search and e-mail services. Google also developed the Android operating system for use with cell phones and other mobile devices. The following data (in millions) were adapted from a recent financial statement of Alphabet. With a market price of $526.40. compute the price-earnings ratio for Year 2.

Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data for Walmart include the actual amounts for 2012 and the projected amounts for Years +1 through +5 for comprehensive income and common shareholders equity, assuming it will use implied dividends as the financial flexible account to balance the balance sheet (amounts in millions). Assume that the market equity beta for Walmart at the end of 2012 was 1.00. Assume that the risk-free interest rate was 3.0% and the market risk premium was 6.0%. Also assume that Walmart had 3,314 million shares outstanding at the end of 2012, and share price was 69.09. REQUIRED a. Use the CAPM to compute the required rate of return on common equity capital for Walmart. b. Compute the weighted-average cost of capital for Walmart as of the start of Year +1. At the end of 2012, Walmart had 48,222 million in outstanding interest-bearing debt on the balance sheet and no preferred stock. Assume that the balance sheet value of Walmarts debt is approximately equal to the market value of the debt. Assume that at the start of Year +1, it will incur interest expense of 4.2% on debt capital and that its average tax rate will be 32.0%. Walmart also had 5,395 million in equity capital from noncontrolling interests. Assume that this equity capital carries a 15.0% required rate of return. (For our forecasts, we assume noncontrolling interests are similar to preferred shares and receive dividends equal to the required rate of return each year.) c. Use the clean surplus accounting approach to derive the projected dividends for common shareholders for Years +1 through +5 based on the projected comprehensive income and shareholders equity amounts. (Throughout this problem, you can ignore dividends to noncontrolling interests.) d. Use the clean surplus accounting approach to project the continuing dividend to common shareholders in Year +6. Assume that the steady-state long-run growth rate will be 3% in Years +6 and beyond. e. Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of dividends to common shareholders for Walmart for Years +1 through +5. f. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement d, compute the continuing value of Walmart as of the beginning of Year +6 based on its continuing dividends in Years +6 and beyond. After computing continuing value, bring continuing value back to present value at the start of Year +1. g. Compute the value of a share of Walmart common stock, as follows: (1) Compute the sum of the present value of dividends including the present value of continuing value. (2) Adjust the sum of the present value using the midyear discounting adjustment factor. (3) Compute the per-share value estimate. h. Using the same set of forecast assumptions as before, recompute the value of Walmart shares under two alternative scenarios. To quantify the sensitivity of your share value estimate for Walmart to these variations in growth and discount rates, compare (in percentage terms) your value estimates under these two scenarios with your value estimate from Requirement g. Scenario 1: Assume that Walmarts long-run growth will be 2%, not 3% as before, and assume that its required rate of return on equity is 1 percentage point higher than the rate you computed using the CAPM in Requirement a. Scenario 2: Assume that Walmarts long-run growth will be 4%, not 3% as before, and assume that its required rate of return on equity is 1 percentage point lower than the rate you computed using the CAPM in Requirement a. i. What reasonable range of share values would you expect for Walmart common stock? Where is the current price for Walmart shares relative to this range? What do you recommend?

RATIO ANALYSIS The Corrigan Corporations 2015 and 2016 financial statements follow, along with some industry average ratios. a. Assess Corrigans liquidity position, and determine how it compares with peers and how the liquidity position has changed over time. b. Assess Corrigans asset management position, and determine how it compares with peers and how its asset management efficiency has changed over time. c. Assess Corrigans debt management position, and determine how it compares with peers and how its debt management has changed over time. d. Assess Corrigans profitability ratios, and determine how they compare with peers and how its profitability position has changed over time. e. Assess Corrigans market value ratios, and determine how its valuation compares with peers and how it has changed over time. f. Calculate Corrigans ROE as well as the industry average KOE, using the DuPont equation. From this analysis, how does Corrigans financial position compare with the industry average numbers? g. What do you think would happen to its ratios if the company initiated cost-cutting measures that allowed it to hold lower levels of inventory and substantially decreased the cost of goods sold? No calculations are necessary. Think about which ratios would be affected by changes in these two accounts. Corrigan Corporation: Balance Sheets as of December 31 2016 2015 Cash 72,000 65,000 Accounts receivable 439,000 328,000 Inventories 894,000 813,000 Total current assets 1,405,000 1,206,000 Land and building 238,000 271,000 Machinery 132,000 133,000 Other fixed assets 61,000 57,000 Total assets 1,836,000 1,667,000 Accounts payable 80,000 72,708 Accrued liabilities 45,010 40,880 Notes payable 476,990 457,912 Total current liabilities 602,000 571,500 Long-term debt 404,290 258,898 Common stock 575,000 575,000 Retained earnings 254,710 261,602 Total liabilities and equity 1,836,000 1,667,000 Corrigan Corporation: Income Statements for Years Ending December 31 2016 2015 Sales 4,240,000 3,635,000 Cost of goods sold 3,680,000 2,980,000 Cross operating profit 560,000 655,000 General administrative and selling expenses 303,320 297,550 Depreciation 159,000 154,500 EBIT 97,680 202,950 Interest 67,000 43,000 Earnings before taxes (EBT) 30,680 159,950 Taxes (40%) 12,272 63,980 Net income 18,408 95,970 Per-Share Data 2016 2015 EPS 0.80 4.17 Cash dividends 1.10 0.95 Market price (average) 12.34 23.57 P/E ratio 15.42 5.65 Number of shares outstanding 23,000 23,000 Industry Financial Ratiosa 2016 Current ratio 2.7 Inventory turnoverb 7.0 Days sales outstandingc 32.0 days Fixed assets turnoverb 13.0 Total assets turnoverb 2.6 Return on assets 9.1% Return on equity 18.2% Return on invested capital 14.5% Profit margin 3.5% Debt-to-capital ratio 50.0% P/E ratio 6.0 aIndustry average ratios have been constant for the past 4 years. bbased on year-end balance sheet figures. cCalculation is based on a 365-day year.