Star Appliance Case Study Essay

4) Using the stock price and return data in Exhibits 5 and 6, estimate the CAPM beta

At the new WACC of 19%, the home appliance and agricultural machinery projects are valued based on their inherent levels of risk. The beta of the industry average home appliance project is 0.95, whereas the beta for the industry average agricultural machine project is calculated as 0.88. CAPM was then employed to find the cost of capital of each project. The cost of capital for the home appliance and agricultural machinery projects were found to be 10.4% and 9.92%, respectively (Appendix B). This analysis allows Star Company to allocate funds to projects that create returns greater than the industry cost of capital for each specific project.

2. 2010 Payout = $3,600,000/$10,800,000 = 0.33 = 33% 2011 Dividends = (0.33)(2009 Net income) = (0.33)($14,400,000) = $4,800,000 (Note: If the payout ratio is rounded off to 33%, 2011 dividends are then calculated as $4,752,000.)

Rate of return on Net Sales: This ratio determines a company’s profit margin on sales. Your company wants a higher number as that shows your company is more profitable. To determine this ratio take the net income and divide it by the net sales. In Year 12 Company G has a return has 6.53% and Year 11 the return was 5.43%. The rate increased by 1.1% over the course of the year. The ratio is showing between the upper and median quartile. This is showing no concern at this time.

Return On Common Stockholders ' Equity: measures profitability of owner investment by subtracting preferred dividend from net income and dividing by average common stockholder 's equity.

What is the cash dividend yield on the Common Stock? (provide formula, data inputs and product.)

8-18 Dividend Growth Annual dividends of General Electric (GE) grew from $0.66 in 2001 to $1.03 in 2006. What was the annual growth rate?

When combining the figures for ROE, ROA and the DuPont analysis it appears that the company is using leverage favourably. ROE is greater than ROA and assets are greater than equity. This is a positive sign for shareholders as it suggests a good investment return in a company that is managing its shareholder equity well (Evans & McDowell, 2009).

One of them is CAPM. However, Linda wants to calculate the cost of common equity by growth rate. In order to calculate, we need to know growth rate of dividend, last year dividend amount and stock price. At the very beginning, I calculate the dividend amounts for last 10 years by multiplying Earning per Share by dividend payout ratio (0.3). Then, I find out the average of the growth rate for last 10 years to use that rate as company’s growth rate (Table 1). The reason for finding adjusted dividend is that it is not possible for company to have negative dividend. It is expected the company’s growth rate would be 125 percent of that experienced from 1988 to 1998. So, I found growth rate as 7.799%. So,

In addition, the rate of return since Dec 9 1998, after CC distributed 7.32 million UBID shares to its shareholder, is 5.72% calculated as following:

Return on Equity = Net Income / Shareholder's Equity. Net income in 1960 is $752,000 and shareholder’s equity is the common stock plus the retained earnings (1,800,000 + 3,256,000. Therefore, return on equity = 14.87%. With their Long-Term notes at 5.5%, the rest of their liabilities would

Return on market = (final index value - initial index value) / initial index value

Using the Du Pont System of Analysis, which is net income divided by the stockholders’ equity, the percentage of return on stockholders’ equity for 2000 is 67%, and for 2001 is 33%.

Range of values per share is from $67 to $83 per share. This is in range of Greenhill's own calculations.

The payout ratio is set at .30 from 2006 onwards. Notice that the long-term growth rate, which settles in between 2011 and 2012, is ROE × ( 1 – dividend payout ratio ) = .10 × (1 - .30) = .07.