Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce CSI to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield CSI a 12% book return on equity. At the end of the year, CSI is expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% of earnings. What will be CSI's stock price once this announcement is made and its consequences for CSI are known? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. a-1. Rate of return a-2. PVGO b. Stock price Answer is not complete. 8% $ 10.71

Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce CSI to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield CSI a 12% book return on equity. At the end of the year, CSI is expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% of earnings. What will be CSI's stock price once this announcement is made and its consequences for CSI are known? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. a-1. Rate of return a-2. PVGO b. Stock price Answer is not complete. 8% $ 10.71

SWFT Individual Income Taxes

43rd Edition

ISBN:9780357391365

Author:YOUNG

Publisher:YOUNG

Chapter18: Accounting Periods And Methods

Section: Chapter Questions

Problem 28CE

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Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce CSI to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield CSI a 12% book return on equity. At the end of the year, CSI is expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded…
The Phoenix (P) Corp. is operating in an essential business that its local council is sponsoring. To induce P Corp to remain in this essential business, the council has agreed to pay whatever amount is necessary to yield P Corp a 14 % book return on equity. P Corp is expected to pay a $ 4 dividend next year (i.e., in year 1). It has been reinvesting 45 % of earnings. (Round answers to two decimal places). If it continues the growth trend. g is equal to 6.3% and the long run rate of return is 10.3 if it was bought at 100 dollars. What is the EPS in year 1. and what part of the $100 price is attributable to the present value of growth opportunities (PVGO) (in $) ?
Hanley Limited manufactures products that capture solar energy. The company plans to list its shares on the Venture Exchange. To do so, it must meet all of the following initial listing requirements (among others): Net tangible assets must be at least $500,000. Pre-tax earnings must be $50,000. The company must have adequate working capital. Hanley has experienced significant growth in sales and is having difficulty estimating its bad debt expense. During the year, the sales team has been extending credit more aggressively in order to increase their commission compensation. Under the percentage-of-receivables approach using past percentages, the estimate is $50,000. Hanley has performed an aging and estimates the bad debts at $57,000. Finally, using a percentage of sales, the expense is estimated at $67,000. Before booking the allowance, net tangible assets are approximately $550,000. The controller decides to accrue $50,000, which results in pre-tax earnings of $60,000.…
Your client, Heron Corporation, has a deficit in accumulated E & P of $300,000. Starting this year, it expects to generate annual E & P of $150,000 for the next four years and would like to distribute this amount to its shareholders. How should Heron Corporation distribute the $600,000 over the four-year period to provide the least amount of dividend income to its shareholders (all individuals)? In a letter to Martin Morales (Heron’s president), make appropriate suggestions on how this should be done. Also prepare a memo for your firm’s file. Heron Corporation’s address is 12 Nature Trail Way, Daytona Beach, FL 32114.
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $15.50, all of which was reinvested in the company. The firm’s expected ROE for the next five years is 19% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm’s ROE on new investments is expected to fall to 14%, and the company is expected to start paying out 35% of its earnings in cash dividends, which it will continue to do forever after. DEQS’s market capitalization rate is 22% per year. What is your estimate of DEQS’s intrinsic value per share if you expected DEQS to pay out only 15% of earnings starting in year 6?
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $14.50, all of which was reinvested in the company. The firm’s expected ROE for the next five years is 18% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm’s ROE on new investments is expected to fall to 13%, and the company is expected to start paying out 20% of its earnings in cash dividends, which it will continue to do forever after. DEQS’s market capitalization rate is 18% per year. Required: What is your estimate of DEQS’s intrinsic value per share? Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? What do you expect to happen to price in the following year? What is your estimate of DEQS’s intrinsic value per share if you expected DEQS to pay out only 25% of earnings…
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $11.50, all of which was reinvested in the company. The firm’s expected ROE for the next five years is 20% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm’s ROE on new investments is expected to fall to 15%, and the company is expected to start paying out 35% of its earnings in cash dividends, which it will continue to do forever after. DEQS’s market capitalization rate is 19% per year. a. What is your estimate of DEQS’s intrinsic value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? (Round your dollar value to 2 decimal places.) . c. What do you expect to happen to…
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $17.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 15% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm's ROE on new investments is expected to fall to 10%, and the company is expected to start paying out 20% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 26% per year. Required: a. What is your estimate of DEQS's intrinsic value per share? b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? c. What do you expect to happen to price in the following year? d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 15% of…
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $18.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 16% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm's ROE on new investments is expected to fall to 11%, and the company is expected to start paying out 30% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 24% per year. Required: a. What is your estimate of DEQS's intrinsic value per share? b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? c. What do you expect to happen to price in the following year? d. What is your estimate of DEQS's intrinsic value per share if you expected DEQS to pay out only 10% of…
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next five years. Its latest EPS was $11.00, all of which was reinvested in the company. The firm's expected ROE for the next five years is 15% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm's ROE on new investments is expected to fall to 14%, and the company is expected to start paying out 30% of its earnings in cash dividends, which it will continue to do forever after. DEQS's market capitalization rate is 15% per year. a. What is your estimate of DEQS's intrinsic value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Intrinsic value b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? (Round your dollar value to 2 decimal places.) Price will by % per year until year 6.
We are going to explore the differences between two different companies, both from the same sector, firms A and B. They differ in their reinvestment abilities. Firm A and Firm B are both financed with equity only. At the end of their business year, both firms report $1,000m in revenue. The net income is $200m for both firms. Assume that management is able to maintain a constant net profit margin of 20%. • Firm A is capable of achieving 8% revenue growth annually by investing 27% of their net income. . Firm B is capable of achieving 8% revenue growth annually by investing 40% of their net income. Assume that this difference persists into the future. a) Find the value of firms A and B. Use a discount rate of 16% for both firms. Value of firm A in millions: Value of firm B in millions: b) The forward P/E ratio of a company is the price of a share divided by next year's earnings per share, or its value divided by next year's earnings. What is the forward P/E ratio of firms A and B? P/E…
Gardial GreenLights, a manufacturer of energy-efficient lighting solutions, has had such success with its new products that it is planning to substantially expand its manufacturing capacity with a $10 million investment in new machinery. Gardial plans to maintain its current 20% debt-to-total-assets ratio for its capital structure and to maintain its dividend policy in which at the end of each year it distributes 35% of the year's net income. This year's net income was $8 million. How much external equity must Gardial seek now to expand as planned? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. million $