CASE ANALYSIS - CARRIUM INSIGHTS INC. The following comprehensive assessment is based on a continuing case study of Carrium Insights Inc. The following financial statements have been provided: Carrium Insights Inc. Income Statement For the year ended December 31, 2020 2020 ('000s) 2,800 Sales Cost of Goods Sold Selling & Marketing Costs Admin. Expenses Depreciation Expense Eamings before Interest & Taxes Interest Expense (1,400) (75) (25) (50) 1,250 (20) 1,230 Taxable Income Taxation (20%) Net Income (246) 984 Dividends (50%) Addition to Retained Eamings 492 492 Carrium Insights Inc. State ment of Financial Positi on As at December 31, 2019 & 2020 2019 2020 2019 2020 ('000s) ('000s) ('000s) ('000s) ASSETS LIABILITIES & EQUITY Current Asse ts Current Liabilities Inventories 600 680 Accounts Payables Nates Payables 1,100 1,360 Accounts Receivables 300 340 700 860 1,340 2,360 Cash & Equivalents 1, 100 1,800 2,220 2,000 Non-current Liabilites 770 568 Non Current Asse ts, Net 1,870 2,240 Total Liabilities 2,570 2,788 Equity Common Stock 820 840 Retained Eamings Total Equity 480 972 1,300 1,812 TOTAL ASSETS 3,870 4,600 TOTAL LIAB. & EQUITY 3,870 4,600
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.
PART A
Utilize the 2020 financial statements for Carrium Insights Inc. provided and assume the company is currently operating at below capacity.
Required: Prepare Pro-Forma statements for 2021 (rounding all figures to the nearest dollar)
assuming:
➢ All costs/income/expenses and net
➢ No new equity is raised.
➢ Sales are projected to increase by 15%.
➢ The tax rate and the dividend payout ratio will remain constant.
➢
Clearly state if Carrium Insights Inc. will require external financing or if the company would have excess financing in 2021, and how much.
PART B
Based on the results of the pro-forma statement in part A above, Carrium is considering buying back some of its common shares to reduce its potential excess financing position. The Finance Manager is seeking to determine if the current value of its stock is fairly priced.
The following anticipated dividend payout structure information is provided:
✓ Carrium’s last dividend paid was $6.00.
✓ The company expects to perform exceedingly well in the coming years and thus intends to
increase the dividend by 10% each year over the next three (3) years.
✓ Thereafter, the company is expected to increase dividends by an annual rate of 5%.
The company currently assumes a required return of 15%.
Required: Given the above, what should be the current price of Carrium’s common shares? Is this stock fairly priced, given that it currently trades for $63.00 per share?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps