Morrissey Technologies Inc.: Balance Sheet as of December 31, 2016 Cash $ 180,000 $ 360,000 Accounts payable Accrued liabilities Receivables 360,000 180,000 Inventories 720,000 Notes payable 56,000 $ 596,000 Total current assets $1,260,000 Total current liabilities Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained eamings 204,000 $2,700,000 Total assets $2,700,000 Total liabilities and equity Morrissey Technologies Inc.: Income Statement for December 31, 2016 Sales $3,600,000 Operating costs including depreciation 3,279,720 $ 320,280 EBIT Interest 20,280 EBT $ 300,000 Taxes (40%) 120,000 Net Income $ 180,000 Per Share Data: Common stock price Earnings per share (EPS) Dividends per share (DPS) $45.00 $ 1.80 $ 1.08
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.
ADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.’s 2016 financial statements are
shown here.
Suppose that in 2017, sales increase by 10% over 2016 sales. The firm currently has 100,000
shares outstanding. It expects to maintain its 2016 dividend payout ratio and believes that
its assets should grow at the same rate as sales. The firm has no excess capacity. However,
the firm would like to reduce its operating costs/sales ratio to 87.5% and increase its total
liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low
relative to the industry average.) The firm will raise 30% of the 2017
forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is
12.5%. Assume that any common stock issuances or repurchases can be made at the firm’s
current stock price of $45.
a. Construct the forecasted financial statements assuming that these changes are made.
What are the firm’s forecasted notes payable and long-term debt balances? What is the
forecasted addition to
b. If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at
what growth rate in sales will the additional financing requirements be exactly zero? In
other words, what is the firm’s sustainable growth rate? (Hint: Set AFN equal to zero
and solve for g.)
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