Answer:
Antitrust law
Explanation:
Antitrust law are a collection of federal and state laws which is meant to create a conducive atmosphere for businesses to operate, such that there would be healthy competition among businesses. This law cut across all sectors such as transportation, health, manufacturing industries etc.
Examples of law promulgated for antitrust are the Sherman act, the Clayton act; all of which are responsible for the prohibition of certain practises by business such as illegal price fixing and corporate mergers which could hinder a market from being competitive, hence break them into smaller units.
Direct Materials, Direct Labor, and Factory Overhead identify the following costs as direct materials, direct labor, or factory overhead for a magazine publisher:______ a. Staples used to bind magazines b. Wages of printing machine employees c. Maintenance on printing machines d. Paper used in the magazine
Answer:
a. Staples used to bind magazines - Direct Material
The staples are integral to holding the magazines so is a direct material.
b. Wages of printing machine employees. - Direct Labor
The printing machine employees are directly related to the magazine's production as they print it.
c. Maintenance on printing machines. - Factory Overhead
This cost is not directly associated with the publishing of the magazine so is an overhead.
d. Paper used in the magazine. -Direct Material
Without paper, the magazine can not be published which makes it a direct material.
In a period of falling interest rates, a bond dealer would engage in which of the following activities?I Raise prices in interdealer quote publications such as Bloomberg for municipal bondsII Place "request for bids" in services such as Bloomberg on appreciated positions where the dealer has no current interestIII Bid for bonds to cover previously established short positionsIV Buy put options on debt instruments to hedge existing short positionsA. I and II onlyB. III and IV onlyC. I, II, IIID. I, II, III, IV
Answer:
C. I, II, III
Explanation:
In a period of falling interest rates, a bond dealer would engage in all of the following activities except for IV. Therefore, a dealer would raise his quoted price in Bloomberg. If the dealer has an appreciated bond that he wishes to sell, he can place ''Request for Bids'' for those bonds in Bloomberg. The dealer may buy bond the he has previously sold short to limit losses due to rising price. To protect existing short position against the rising price, the dealer will buy call options, not put options. Put options are used in protecting existing long position from falling price.
The Uniform Commercial Code ("UCC") recognizes explicit, stated promises as being ________ warranties.
Answer:
Express.
Explanation:
The uniform commercial code (UCC) is a set of standardized business laws which are put in place for the regulation of financial contracts and commercial transactions used across different states in the United States of America.
A warranty can be defined as a written promise or guarantee made by a manufacturer, lessor or seller about the identity or quality of goods and services or a property to a purchaser, promising him or her to repair or replace it if necessary within a specified time frame.
The Uniform Commercial Code ("UCC") recognizes explicit, stated promises as being express warranties. An express warranty is typically considered to be an affirmative promise about the quality or characteristics of an item that is being sold to a buyer and as such it is binding and enforceable by law.
if you start making $265 monthly contributions today and continue them for four years, what is the furture value if the compounding rate is 9.75 percent APR?
Answer:
FV= $15,482.98
Explanation:
Giving the following information:
Monthly investment= $265
Number of periods= 12*4= 48
Interest rate= 0.0975/12= 0.00813
To calculate the future value, we need to use the following formula:
FV= {A*[(1+i)^n-1]}/i
A= monthly deposit
FV= {265*[(1.00813^48) - 1]} / 0.00813
FV= $15,482.98
Which of the following statements regarding the Securities and Exchange Commission (SEC) is not true?
a. SEC rules frequently require disclosures in addition to those required by GAAP.
b. The SEC has the authority to establish and enforce accounting rules for public companies.
c. Public companies must register with the SEC.
d. The SEC is a private professional organization.
Answer:
d. The SEC is a private professional organization.
Explanation:
SEC stands for Securities and Exchange Commission. It is the United States of America's federal government agency which regulates the market laws.
The main function of this body is to maintain fair and efficient market, protect the investors and facilitate the capital formation.
All the companies must be a part of the SEC agency as given by the federal law of the US.
The calculation for annual depreciation using the units-of-output method is:________
a. (Initial cost Estimated output) × Actual yearly output
b. (Depreciable cost Yearly output) × Estimated output
c. Depreciable cost Yearly output
d. (Depreciable cost Estimated output) × Actual yearly output
Answer:
d. (Depreciable cost Estimated output) × Actual yearly output
Explanation:
Units of Output depreciation = Cost - Residual Value × Period`s Production / Total Expected Production.
Note : Depreciation is dependable on depreciable cost (Cost less Residual Value)
The Option that is close to this formula is d.
The management of ABC Corporation is alarmed by their operating losses. They are considering dropping the B product line. The company accountants have prepared the following analysis to help make this decision.
Answer:
When you keep selling you will have a loss of $14000
And when you do not sell Product B you will have a profit of $ 8000.
So It is advisable to drop Product B.
Explanation:
ABC Corporation
Income Statement
Total A B
Sales 930,000 575,000 355,000
Variable Costs 507,000 267,000 240,000
Contribution Margin 423,000 308,000 115,000
Fixed Costs
Manufacturing 375,000 225,000 150,000
Selling & Administrative
62,000 45000 17000
Total F. Costs 437,000 270,000 167,000
Opertng Income (loss)(14000) 38,000 (52,000)
ABC Corporation
Differential Analysis
Keep Selling Does Not Difference
Keep Selling Variances
Sales 930,000 575,000 (355,000)
Var. Costs 507,000 267,000 240,000
C. M 423,000 308,000 (115,000)
Fixed Costs
Manufacturing 375,000 255,000 120,000
Selling &
Administrative 62,000 45000 17000
Total F. Cost 437,000 300,000 137,000
Oprting. P (loss) (14000) 8,000 (22,000)
We see that when the company is selling Product B it has a loss of $ 14000 and when it does not sell Product B it has a profit of $ 8000. Therefore it is advisable to stop selling product B. If we look at the variances the Sales revenue decreases by $ 355,000 and so do the variable costs by $ 240,000.There is a decrease in the Contribution Margin but there is an increase in the net income so the Product B must not be sold.
how would you predict the survivorship curve of a developed country would compare to that of a developing country
Answer:
The survivorship curve of a developed country would show a higher percentage of people surviving to each each group than in a developing country.
This is because in developing country life expectancy is lower than in developed countries.
The reason is that developing countries have less economic resources to invest in health systems, and also because in developing countries, many more people are poorer, and poorer people are more likely to suffer from disease.
Monica has found that her contribution margin per hour of time for her highest selling product is $2,500. She wants to dedicate an extra 40 hours a month to this product, but she needs to know the increase in contribution margin if she does this. The product generally sells for $100 a unit. What would be the increase in contribution margin for this product?
Answer:
$100,000
Explanation:
Calculation for what would be the increase in contribution margin for this product
Using this formula
Increase in contribution margin= Contribution margin per hour of time × Extra hours
Let plug in the formula
Increase in contribution margin=$2,500×40 hours
Increase in contribution margin=$100,000
Therefore What would be the increase in contribution margin for this product will be $100,000
During September, the capital expenditure budget indicates a $520000 purchase of equipment. The ending September cash balance from operations is budgeted to be $67000. The company wants to maintain a minimum cash balance of $35000. What is the minimum cash loan that must be planned to be borrowed from the bank during September?
Answer:
$488,000
Explanation:
He capital expenditure balance indicates a $520,000 purchase of equipment.
September ending cash balance is budgeted at $67,000
The company wants to maintain a minimum cash balance of $35,000
Therefore the minimum cash loan to be borrowed from the bank can be calculated as follows
= $520,000-$67,000+$35,000
= $488,000
Hence, the minimum cash loan that must be planned to be borrowed from the bank during September is $488,000
Answer:
the minimum cash loan that must be planned to be borrowed is $418,000.
Explanation:
The Cash Budget is prepared to highlight times for cash surpluses - allowing arrangements for investments of those surpluses to gain maximum return.
The Cash Budget also highlight times for Cash deficit - allowing for short term alternative sources of finance.
September Cash Budget Reconciliation :
Purchase of Equipment $520,000
Less Cash Balance ($67,000)
Less Minimum Cash Balance ($35,000)
Budgeted Loan Balance $418,000
"Which call covenant MUST be considered when computing the dollar price of a municipal premium bond quoted on a yield basis?"
Answer: In whole call
Explanation:
The yield basis is a method that is used to quote a fixed-income security price as a yield percentage. The yield basis allows bonds that has different characteristics to be compared easily. It is calculated when the coupon amount that is paid yearly is divided by bond purchase price.
The call covenant that must be considered when computing the dollar price of a municipal premium bond quoted on a yield basis is the in whole call. This is a form of callable bond whereby the entire issue will have to be called at once.
A broker-dealer that is registered in Illinois and that is not registered in any other State may effect transactions in securities:
Answer: with any existing customer who is a resident of Illinois and is on vacation anywhere in the United States.
Explanation:
A broker-dealer is an economic agent that purchases and also sells securities for either its own account or transacts on behalf of its customers.
A broker-dealer that is registered in Illinois and that is not registered in any other State may effect transactions in securities with any existing customer who is a resident of Illinois and is on vacation anywhere in the United States.
Chik’s Chickens has accounts receivable of $6,333. Sales for the year were $9,800. What is its average collection period?
Answer:
The answer is 235 days
Explanation:
Average collection period can also be called Days' outstanding period. And it is the number of days it takes a business to collect its money or receivables from the goods or services sold on credit.
Days' reveivables period or Average collection period = 365 days / reveivables turnover.
Receivables turnover = Sales/ average receivable
$9,800/$6,333
= 1.55
Average collection period=
365 days/1.55
=235 days
Suppose Stark Ltd. just issued a dividend of $1.59 per share on its common stock. The company paid dividends of $1.25, $1.33, $1.40, and $1.51 per share in the last four years. a. If the stock currently sells for $40, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. What if you use the geometric average growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
Explanation:
arithmetic average growth rate = {[(1.33 - 1.25)/1.25] + [(1.40 - 1.33)/1.33] + [(1.51 - 1.40)/1.40] + [(1.59 - 1.51)/1.51]} / 4 = {0.064 + 0.053 + 0.079 + 0.053} / 4 = 0.06225 x 100 = 6.225%
geometric growth rate = ⁴√{0.064 x 0.053 x 0.079 x 0.053} = 0.061%
a) using arithmetic average growth rate
Div₁ = $1.59 x 1.06225 = $1.689
P₀ = $40
g = 6.225%
40 = 1.689 / (Re - 0.06225)
Re - 0.06225 = 1.689 / 40 = 0.04222
Re = 0.04222 + 0.06225 = 0.10447 = 10.45%
b) using geometric average growth rate
Div₁ = $1.59 x 1.061 = $1.68699
P₀ = $40
g = 0.061%
40 = 1.68699 / (Re - 0.061)
Re - 0.061 = 1.68699 / 40 = 0.04217
Re = 0.04217 + 0.061 = 0.103174 = 10.32%
A company's income statement showed the following: net income, $134,000; depreciation expense, $30,000; and gain on sale of plant assets, $4,000. An examination of the company's current assets and current liabilities showed the following changes as a result of operating activities: accounts receivable decreased $9400; merchandise inventory increased $18,000; prepaid expenses increased $6,200; accounts payable increased $3,400. Calculate the net cash provided or used by operating activities.
A. $141,000.
B. $96,600.
C. $156,60o.
D. $88,600.
E. $148.600.
Answer:
E. $148,600
Explanation:
Cash flow from operating activities.
Net income. $134,000
Add: Depreciation. $30,000
Less: Gain on sale ($4,000)
Changes in working
Capital
Add: decrease in
Accounts receivable $9,400
Less: increase in
Merchandise inv. ($18,000)
Less: increase in
Prepaid expenses ($6,200)
Add: increase in
Accounts payable $3,400 ($14,600)
Net cash provided used by $148,600
Operating activities
What would be the future value of $15,555 invested now if it earns interest at 14.5 percent for seven years
Answer:
$40,133.63
Explanation:
we can use the future value formula:
future value = present value x (1 + interest rate)ⁿ
present value = $15,555interest rate = 14.5%n = 7 yearsfuture value = $15,555 x (1 + 14.5%)⁷ = $15,555 x 1.145⁷ = $15,555 x 2.580111097 = $40,133.63
When nations increase production in their area of _________________ and trade with each other, both sides can benefit.
Answer:
comparative advantage
Explanation:
Comparative advantage in finance is crucial for production because it helps nation to manufacture their goods with low opportunity cost compare to their co- partner in that production line.
Production which is an essential aspect in economics is a process of turning raw materials into finished goods are very crucial in each nation of the world and for economic process to be completed.
It should be noted that When nations increase production in their area of comparative advantage and trade with each other, both sides can benefit from it.
Whereas ______________ are willing to violate procedures and operate outside normal channels, ______________ gather hard data and develop a strong case for why a project should be killed.
Answer:
Product champions
Exit champions
Explanation: A product champion is a person who who takes front lines in creating, defining, Developing etc of a product and making the product a delight to the customers, stakeholders etc product champions helps to ensure that the products are loved and valued by the customers.
Exit champions go a long way to ensure that they enough detail and information about a product with the aim of ensuring that the product is exited from the market.
Surveys on the early warning signs of project failure indicate that a red flag for failure is: The time to complete the project lengthens. The low probability of achieving commercial objectives. The political forces have turned against the project. The benefits of the project won't be realized until the end.
Answer:
The low probability of achieving commercial objectives
Explanation:
Project failure is a term that describes the inability of a business to meet its objectives in terms of expected outcomes in relation to budget and time. The project failure can be a result of one or various factors.
Hence, various surveys on the early warning signs of project failure suggest that a red flag for failure actually indicates: The low probability of achieving commercial objectives.
Why is there an inherent conflict between planning and control uses of budgets?
Answer:
The main conflict that results between planning and control use of budgets is that managers might place their own personal interests before the interests of the company. This might result in budgets that are easily achievable (resulting in bonuses) or shifting income from one period to another in order to achieve certain budgets that will result in bonuses.
I will use a real life example that happened to me to explain this. I worked as a B2B sales representative for a large corporation (we were only 2 B2B salespeople + 1 manager) and when sales were slowing down, upper management would set up bonuses for achieving certain sales goals. The problem was that intentionally certain large sales that required management's approval were delayed and total sales would fall. Then suddenly the bonus show sup and all the large sales were approved and in two weeks the sales goals were achieved. Since B2B sales are not about selling to a lot of customers, but instead selling to the right customers a lot of products, a couple of delayed big sales made a huge difference and a 1% bonus meant changing your old car for a new one.
Suppose you deposit $1,682.00 into and account 4.00 years from today into an account that earns 5.00%. How much will the account be worth 18.00 years from today
Answer:
FV= $3,330.25
Explanation:
Giving the following information:
Initial investment= $1,682.00
Number of periods= 14 years
Interest rate= 5% compounded annually
To calculate the future value, we need to use the following formula:
FV= PV*(1+i)^n
PV= present value
i= interest rate
n= number of years
FV= 1,682*(1.05^14)
FV= $3,330.25
A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A) $33.33.
B) $0.27.
C) $31.82.
D) $56.25.
Answer:
Intrinsic value of this preferred stock. = $33.33
Explanation:
Given:
Dividend per year = $3
Required rate of return = 9%
Growth rate = 0
Find:
Intrinsic value of this preferred stock.
Computation:
Intrinsic value of this preferred stock. = D / (r - g)
Intrinsic value of this preferred stock. = $3 / (9% - 0)
Intrinsic value of this preferred stock. = $33.33
The Intrinsic value of the preferred stock is $33.33.
Given Information
Dividend per year = $3
Required rate of return = 9%
Growth rate = 0
Intrinsic value of this preferred stock. = D / (r - g)
Intrinsic value of this preferred stock. = $3 / (9% - 0)
Intrinsic value of this preferred stock. = $33.33
Hence, the Intrinsic value of the preferred stock is $33.33.
Therefore, the Option A is correct.
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Fama and French (1992) found that the stocks of firms within the highest decile of book-to-market ratios had an average annual return of _______, while the stocks of firms within the lowest decile of book-to-market ratios had an average annual return of ________. Group of answer choices 13.2%; 16.4% 11.1%; 17.2% 15.6%; 13.1% 17.2%; 11.1%
Answer:
1. 17.2%
2. 11.1%
Explanation:
In a research study carried out by Fama and French in 1992 titled "The Cross‐Section of Expected Stock Returns." Their findings showed that the stocks of firms within the highest decile of book-to-market ratios had an average annual return of 17.2%, while the stocks of firms within the lowest decile of book-to-market ratios had an average annual return of 11.1%
Hence, the correct answer to the question is: 17.2% and 11.1% respectively.
A new municipal bond issue had a dated date of January 1, 2018. The first coupon was due on August 1, 2018. The customer bought for settlement on September 1, 2018. How many months of accrued interest must he pay at settlement
Answer:
1 month
Explanation:
The last coupon paid by this bond was made on August 1, 2018, and the transaction is made on September 1, 2018, therefore, only 1 month has passed since the last coupon was paid. Therefore, accrued interests will be charged for only 1 month.
When bonds are sold including accrued interests, they are said to be sold at their dirty price.
According to the text, several new technologies are expected to have dramatic impacts on marketing. Among those cited are
Answer:
Internet of Things, autonomous vehicles, wearable technology, and artificial intelligence.
Explanation:
Among those cited are the Internet of Things, autonomous vehicles, wearable technology, and artificial intelligence. All of these are innovations that work together to make smart technology, these are technologies that use artificial intelligence and interconnect between one another and the internet in order to communicate, share, analyze, and store valuable information while at the same time learning and adapting.
The defect rate for data entry of insurance claims at Sadegh Kazemi Insurance Co. has historically been about 1.50%. This exercise contains only parts a, b, c, d, and e. a) If you wish to use a sample size of 200, the 3-sigma control limits are:
Answer and Explanation:
Data provided in the question
defect rate i.e. [tex]\bar p[/tex] = 1.50%
the sample size = n = 200
Now
[tex]S_p = \sqrt{\frac{\bar p (1 - \bar p)}{n} } \\\\= \sqrt{\frac{1.50\% (1 - 1.50\%)}{200} }[/tex]
= 0.008595057
Now the 3 sigma control limits is
UCL_p = [tex]\bar p[/tex] + 35p
= 0.015 + 3 (0.008595057 )
= 0.04078517
LCL_p = [tex]\bar p[/tex] - 35p
= 0.015 - 3 (0.008595057 )
= 0
hence, the 3 sigma control limits are UCL 0.04078517 and LCL 0 respectively
A company is considering several investment opportunities. The investments have been evaluated using payback period and break-even time. Only one project will be chosen and time value of money is important. The company should choose the project which the:_______.
Answer:
Break-even time is the shortest
Explanation:
Break-even time is an investment time base measurements which is used to evaluate the amount of time required before the present value of the net cash flows from an investment equals its initial cost. Thus, in this the project, the project with shortest break even time should be chosen by the company since time value of money is considered.
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.25 .1323 Repete Co. .87 .0967 a. Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market
Answer:
The expected return on the market rate is 10.59%
Explanation:
Expected return=risk-free rate +Beta*(market rate- risk-free rate)
13.23 = Rf + 1.25*(Rm-Rf)
13.23 = 1.25Rm- 0.25Rf
Rm = (13.23 + 0.25Rf ) / 1.25 .............(equ i)
9.67 = Rf+0.87*(Rm-Rf)
9.67 = 0.13Rf+0.87Rm
Substitute (13.23+0.25Rf)/1.25 for Rm from equ (i)
9.67 = 0.13Rf+0.87*(13.23+0.25Rf)/1.25
9.67 = 0.13Rf+9.20808+0.174Rf
Rf = (9.67-9.20808)/(0.13+0.174)
Rf = 0.46192 / 0.304
Rf = 1.519474
Rf = 1.52%
Hence, Risk free rate is 1.52%
From the equ (i)
Rm = (13.23+0.25Rf)/1.25
Rm = (13.23+0.25(1.52%)/1.25
Rm = (13.23+0.003 ) /1.25
Rm = (13.23+0.003 ) /1.25
Rm = 13.233 / 1.25
Rm = 10.5864
Rm = 10.59%
Hence, expected return on Market rate is 10.59%
The following events took place for Rushmore Biking Inc. during February, the first month of operations as a producer of road bikes:Purchased $480,000 of materials.Used $434,500 of direct materials in production.Incurred $125,000 of direct labor wages.Applied factory overhead at a rate of 40% of direct labor cost.Transferred $578,000 of work in process to finished goods.Sold goods with a cost of $550,000.Revenues earned by selling bikes, $910,000.Incurred $185,000 of selling expenses.Incurred $90,000 of administrative expenses.Required:a. Prepare the income statement for Rushmore Biking Inc. for the month ending February 28. Assume that Rushmore Biking Inc. uses the perpetual inventory method.b. Determine the inventory balances on February 28, the end of the first month of operations.
Answer: Please find answers in the explanation column
Explanation:
Using the perpetual inventory method.
Rushmore Biking Inc
Income Statement For the Month Ended February 28
Revenue $910,000
Cost of goods sold -$550,000
Gross profit $360,000
Selling and administrative expense:
Selling expense $185,000
Administrative expense $90,000
Total Selling and administrative expense $275,000
Operating income
(Gross profit -Total Selling and administrative expense)
$85,000
b) Inventory balance on Current assets for February 28
Direct Materials inventory
Purchases of materials- direct materials used in production
= $480,000- $434, 500= $45500
Work in process inventory
direct materials used in production+Direct labor wages incurred+Factory overhead applied-Transferred to finished goods
= $434500+125000+ ($125000*40%) - 578000
= $434500+125000+$50,000 - $578000
=$31,500
Finished goods inventory
Transferred to finished goods-Cost of goods sold
= $578,000-550,000= $28000
The preparation of the income statement and the balance of the inventory should be shown below.
a. Preparation of income statement:Rushmore Biking Inc
Income Statement For the Month Ended February 28
Revenue $910,000
Less:Cost of goods sold -$550,000
Gross profit $360,000
Selling and administrative expense:
Less: Selling expense $185,000
Less: Administrative expense $90,000
Total Selling and administrative expense $275,000
Operating income $85,000
Working note:
= Gross profit -Total Selling and administrative expense
= Operating income
b) The inventory balances on February 28:
Direct Materials inventory:
= Purchases of materials- direct materials used in production
= $480,000- $434, 500= $45500
Work in process inventory
= direct materials used in production+Direct labor wages incurred+Factory overhead applied-Transferred to finished goods
= $434500+125000+ ($125000*40%) - 578000
= $434500+125000+$50,000 - $578000
=$31,500
Finished goods inventory:
=Transferred to finished goods-Cost of goods sold
= $578,000-550,000= $28000
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The market consensus is that Analog Electronic Corporation has an ROE = 9%, a beta of 1.25, and plans to maintain indefinitely its traditional plowback ratio of 2/3. This year’s earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year’s market return is 14%, and T-bills currently offer a 6% return. a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 1/3. Find the intrinsic value of the stock.
Answer:
a. Stock Price is $10.60.
b. Trailing P/E ratio is 3.53, while Leading P/E ratio is 3.33.
c. Present value of growth opportunitiesis -$9.28.
d .Stock Price is $15.85.
Explanation:
The following are given in the question:
ROE = 9%
b = beta = 1.25
pr = Plowback ratio = 2/3 = 0.67
dpr = dividend payout ratio = 1- pr = 1/3 = 0.33
e0 = This year’s earnings per share = $3
mr = The coming year’s market return = 14%
tr = T-bills return = 6%
We can now proceed as follows:
a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The stock price can be calculated using the following formula:
P0 = Stock Price = d * (1 + g) / (r - g) …………………………. (1)
Where;
d = dividend per share = e0 / dpr = $3 / (1 / 3) = $1
g = Sustainable growth rate = ROE * pr = 9% * 2/3 = 0.06
rf = Risk free rate = Return on T-bills = 6%
b = Beta = 1.25
mr = Market return = 14%
r = Required return on Equity = rf + b * (mr - rf) = 6% + 1.25 * (14% - 6%) = 0.16
Substituting the values into equation (1), we have:
Stock Price = $1 * (1 + 0.06) / (0.16 – 0.06)
Stock Price = $1 * 1.06 / 0.10
Stock Price = $1 * 10.60
P0 = Stock Price = $10.60
b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Trailing P/E ratio = P0/E0 = $10.60 / $3 = 3.53
Leading P/E ratio = P0/e1 ………………………………………. (2)
Where;
e1 = e0 * (1 + g) = $3 * (1 + 0.06) = 3.18
Substituting the values into equation (2), we have:
Leading P/E ratio = $10.60 / 3.18 = 3.33
c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
P0 = e1 / r + pvgo …………………………………… (3)
Where pvgo denotes present value of growth opportunities, and P0, e1 and r are as already obatained in part a and b.
Substituting the values into equation (2) and solve for pvgo, we have:
$10.60 = $3.18 / 0.16 + pvgo
$10.60 = $19.875 + pvgo
pvgo = $10.60 - 19.875
pvgo = -$9.28
d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 1/3. Find the intrinsic value of the stock.
g = ROE * pr = 9% * (1 / 3) = 3%
dpr = 1 – pr = 1 - 1/3 = 2/3
d = dividend per share = e0 / dpr = $3 / (2 / 3) = $2
Stock Price = d * (1 + g) / (r - g) = $2 * (1 + 3%) / (0.16 – 3%)
Stock Price = $2 * (1 + 3%) / (0.16 – 3%)
Stock Price = $15.85