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1)
1). Taco Time Corporation is evaluating an extra dividend versus a share repurchase. In either case, $20,140 would be spent. Current earnings are $3.50 per share, and the stock currently sells for $89 per share. There are 3,800 shares outstanding. Ignore taxes and other imperfections. What will the company's EPS and PE ratio be under the two different scenarios?
Extra Dividend Share Repurchase
EPS
PE Ratio
2). Columbia Industries is planning its operations for next year, and Merle Smith, the CEO, wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are show below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.
Last year's sales = S0 $700 Last year's accounts payable $80
Sales growth rate = g 30% Last year's notes payable $100
Last year's total assets = A0* $1000 Last year's accruals $60
Last year's profit margin = PM 5% Target payout ratio 60%
3). Last year Eggs Inc. had $1,700 million of sales, and it had $850 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
Expert Solution
1). Computation of the EPS and PE ratio under extra dividend scenario:-
EPS = Earnings / Number of shares
= (3,800*$3.50) / 3,800
= $13,300 / 3,800
= $3.50 per share
Dividend per share = $20,140 / 3,800
= $5.30
Share price after the dividend = $89 - $5.30
= $83.70
PE ratio = Share price after the dividend / EPS
= $83.70 / $3.50
= 23.91 times
Computation of the EPS and PE ratio under repurchase scenario:-
Number of shares repurchased = $20,140 / $89
= 226.29 shares
Total earnings = 3,800*$3.50
= $13,300
EPS = Total earnings / Number of shares
=$13,300 / (3,800 - 226.29)
= $13,300 / 3,573.71
= $3.72 per share
PE ratio = Price / EPS
= $89 / $3.72
= 23.91 times
2). Computation of the additional funds needed (AFN):-
S1 = S0*(1+growth rate)
= $700 * (1+30%)
= $910
ΔS = S1 - S0
= $910 - $700
= $210
L = Accounts payable + Accruals
= $80 + $60
= $140
AFN = ((A0/S0)*ΔS) - ((L/S0)*ΔS) - (Margin * S1 * (1 − Payout))
= ((1000/700)*210) - ((140/700)*210) - (5%*910*(1-60%))
= $300 - $42 - 18.20
= $239.80 Or $240
3). Computation of the maximum sales growth rate:-
Full capacity sales = Actual sales / % of capacity
= $1,700 / 60%
= $2,833.33 million
Growth in sales = (Full capacity sales - Actual sales) / Actual sales
= ($2,833.33 - $1,700) / $1,700
= $1,133.33 / $1,700
= 66.67%
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