Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Labrador technologies Inc. plans to become public soon. The board of directors
would like to know the value of common equity and have asked for your opinion.
The firm has $1,249,917 in preferred equity and the market value of its
outstanding debt equals $2,049,396. The WACC for this firm is estimated to be
8.92%. For this example assume the current assets are zero. Use the DCF valuation
model with the expected FCFs shown below; year 1 represents one year from today and
so on. The company expects to grow at a 3.0% rate after Year 5. Rounding to the
nearest penny, what is the value of common equity?
Free Cash
Period
Flow
Year 1 $1,370,274
Year 2 $1,761,479
Year 3 $1,909,652
Year 4 $2,361,090
Year 5 $2,744,645
see attached
Westfield Capital Management Co.’s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry’s Departmental Stores ( JDS) or Miller Stores (MLS). Selected financial data for both companies follow:
Required:
ComputeeachofthefollowingratiosforbothJDSandMLS: (1) Price-to-bookratio(2) Total-debt-to-equityratio(3) Fixed-asset-utilization(turnover)
Select the company that better meets Westfield’s criteria.
4. (Question 4 is composed of two parts.) The DuPont formula defines the net return on
shareholders' equity as a function of the following components:
•
Operating margin
Asset turnover
Interest burden
Financial leverage
Income tax rate
Using only the data in the table shown below:
a. Calculate each of the five components listed above for 2010 and 2014, and calculate the
return on equity (ROE) for 2010 and 2014, using all of the five components. Show
calculations.
b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the
change in ROE from 2010 to 2014.
Income Statement Data
Revenues
Operating income
Depreciation and amortization
Interest expense
Pretax income
Income taxes
Net income after tax
Balance Sheet Data
Fixed assets
Total assets
Working capital
Total debt
Total shareholders' equity
2010
$542
38
3
3
32
13
19
2010
$41
245
123
16
159
2014
$979
76
9
0
67
37
30
2014
$70
291
157
0
220
Chapter 11 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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