Contemporary Financial Management
Contemporary Financial Management
14th Edition
ISBN: 9781337090582
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: Cengage Learning
Question
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Chapter 3, Problem 18P

a)

Summary Introduction

To determine: Earnings per share.

a)

Expert Solution
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Explanation of Solution

Calculation of EPS:

EPS=EAT(Averagenumberofsharesoutstanding)=$21,000,000(5,000,000)=$4.20

Hence, Earnings per share (EPS) is $4.20

b)

Summary Introduction

To determine: Price-to-earnings ratio.

b)

Expert Solution
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Explanation of Solution

Calculation of price-to-earnings ratio:

Price-to-earningsratio=MarketpriceEPS=$32$4.20=$7.6

Hence, price earnings ratio is $7.6.

c)

Summary Introduction

To determine: Book value per share.

c)

Expert Solution
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Explanation of Solution

Calculation of book value per share:

Bookvalue per share=(Commonstock+contributedcapitalinexcessofparvalue+Retainedearnings)Averagenumberofsharesoutstanding=($5,000,000+$20,000,000+$55,000,000)5,000,000=$16

Hence, book value per share is $16

d)

Summary Introduction

To determine: Market-to-book ratio.

d)

Expert Solution
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Explanation of Solution

Calculation of market-to-book ratio:

Market to book ratio=$32$16=2.0

Hence, book value per share is $16

e)

Summary Introduction

To determine: EV-EBITDA multiple.

e)

Expert Solution
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Explanation of Solution

Calculation of EV-EBITDA multiple:

EV is nothing but the enterprise value

EV=Marketvalueofequity+Marketvalueofdebt

Marketvalueofequity=Marketvalueofstock× Number of shares outstanding=$32×5 million=$160 million

Marketvalueofdebt=Long term debt+current liabilities=$40+$30=$70 million

Calculation of enterprise value:

EV=Marketvalueofequity+Marketvalueofdebt=$160million+$70million=$230million

Hence, enterprise value is $230 million

Calculation of EBITDA:

EBITDA=EBIT+Depreciation=$40million+$10million=$50million

Hence, EBITDA is $50 million

Calculation of EV-EBITDA multiple:

EV-EBITDA multiple=$230million$50million=4.6times

Hence, EV-EBITDA multiple is 4.6 times

f)

Summary Introduction

To determine: Addition to retained earnings.

f)

Expert Solution
Check Mark

Explanation of Solution

Calculation of additions to retained earnings:

Additions to retained earnings=Netincomedividends=$21million$10million=$11million

Hence, additions to retained earnings are $11million.

g)

Summary Introduction

To construct: New balance sheet of Company E.

g)

Expert Solution
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Explanation of Solution

Excel spreadsheet:

Contemporary Financial Management, Chapter 3, Problem 18P , additional homework tip  1

Excel workings:

Contemporary Financial Management, Chapter 3, Problem 18P , additional homework tip  2

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