Bicycle Company had the following operating results for 2021-2022. In addition, the company paid dividends in both 2021 and 2022 of $80,000 per year and made capital expenditures in both years of $230,000 per year. The company's stock price in 2021 was $14.20 and $12.50 in 2022. Also in 2022, the industry average earnings multiple for the bicycle industry was 8 and the free cash flow and sales multiples were 16 and 1.35, respectively. The company is publicly owned and has 1,400,000 shares of outstanding stock at the end of 2022. Balance Sheet, December 31, 2022 2021 Cash $ 267,000 $ 100,000 Accounts Receivable $ 525,000 $ 400,000 Inventory $ 450,000 $ 300,000 Total Current Assets $ 1,242,000 $ 800,000 Long-lived Assets 1,205,000 1,100,000 Total Assets $ 2,447,000 $ 1,900,000 Current Liabilities $ 500,000 $ 300,000 Long-term Debt 600,000 500,000 Shareholder Equity 1,347,000 1,100,000 Total Debt and Equity $ 2,447,000 $ 1,900,000 Income Statement, for year ended December 31, 2022 2021 Sales $ 6,250,000 $ 5,450,000 Cost of Sales 5,125,000 4,400,000 Gross Margin 1,125,000 1,050,000 Operating Expenses 580,000 550,000 Operating Income 545,000 500,00
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Q9
The Harrison Bicycle Company had the following operating results for 2021-2022. In addition, the company paid dividends in both 2021 and 2022 of $80,000 per year and made capital expenditures in both years of $230,000 per year. The company's stock price in 2021 was $14.20 and $12.50 in 2022. Also in 2022, the industry average earnings multiple for the bicycle industry was 8 and the
| Balance Sheet, December 31, | ||
| 2022 | 2021 | |
|---|---|---|
| Cash | $ 267,000 | $ 100,000 |
| Accounts Receivable | $ 525,000 | $ 400,000 |
| Inventory | $ 450,000 | $ 300,000 |
| Total Current Assets | $ 1,242,000 | $ 800,000 |
| Long-lived Assets | 1,205,000 | 1,100,000 |
| Total Assets | $ 2,447,000 | $ 1,900,000 |
| Current Liabilities | $ 500,000 | $ 300,000 |
| Long-term Debt | 600,000 | 500,000 |
| Shareholder Equity | 1,347,000 | 1,100,000 |
| Total Debt and Equity | $ 2,447,000 | $ 1,900,000 |
| Income Statement, for year ended December 31, | ||
| 2022 | 2021 | |
|---|---|---|
| Sales | $ 6,250,000 | $ 5,450,000 |
| Cost of Sales | 5,125,000 | 4,400,000 |
| Gross Margin | 1,125,000 | 1,050,000 |
| Operating Expenses | 580,000 | 550,000 |
| Operating Income | 545,000 | 500,000 |
| Taxes | 218,000 | 200,000 |
| Net Income | $ 327,000 | $ 300,000 |
| Cash Flow From Operations | 2022 | 2021 |
|---|---|---|
| Net Income | $ 327,000 | $ 300,000 |
| Plus |
125,000 | 125,000 |
| + Decrease (-increase) in Accounts Receivable and Inventory | (275,000) | 0 |
| + Increase (-decrease) in Current Liabilities | 200,000 | 0 |
| Cash Flow from Operations | $ 377,000 | $ 425,000 |
The value of the company, calculated using the free cash flow multiple for 2022 is:
-
$2,616,000
-
$1,072,000
-
$1,347,000
-
$8,437,500
-
$2,520,000
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