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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Chapter 12, Problem 6QE
Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative
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A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
a. The company's profit margin increases.
b. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
c. The company increases its dividend payout ratio.
d. The company decides to stop taking discounts on purchased materials.
e. The company begins to pay employees monthly rather than weekly.
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She
anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she
anticipates 15 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio
will go up to 31 percent and will eventually reach 55 percent during the maturity stage (IV).
Anthe
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during
each stage. (Leave no cells blank - be certain to enter "O" wherever required. Do not round intermediate calculations and round
your answers to 2 decimal places.)
Stage I
Stage II
Stage III
Stage IV
Stage I
Stage II
Stage III
Stage IV
$ 0.35
1.60
2.70
3.60
Aftertax income
Dividends
b. Assume in Stage IV that an investor owns 310 shares and is in a 15 percent tax…
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She
anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II),
she anticipates 15 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the
payout ratio will go up to 33 percent and will eventually reach 57 percent during the maturity stage (IV).
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any)
during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations
and round your answers to 2 decimal places.)
Stage I
Stage II
Stage III
Stage IV
Stage I
Stage II
Stage III
Stage IV
$ 0.30
1.85
2.60
3.80
Aftertax income
Dividends
b. Assume in Stage IV that an investor owns 335 shares and is in a 15 percent tax…
Chapter 12 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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- A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 14 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 40 percent and will eventually reach 53 percent during the maturity stage (IV). a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. Note: Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places. Stage I Stage II Stage III Stage IV Stage I Stage II Stage III Stage IV $ 0.25 1.65 2.40 3.90 Aftertax income Dividends b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax…arrow_forwardCan a firm have negative residual income (i.e., abnormal earnings)? What does this mean? Suppose you are valuing a growing firm and you forecast that it will have negative abnormal earnings for the next five years. Can you use the abnormal earnings valuation approach when abnormal earnings are negative?arrow_forwardA financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 59 percent during the maturity stage (IV). a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.) Stage I $ 0.40 Stage II 1.80 Stage III 2.70 Stage IV 3.30 b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the…arrow_forward
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