Lightbridge corporation has 500,000 shares of common stock that currently trade for $40 per share. The net income reported for last year is $2,000,000. Their expansion is expected to continue, and they estimate that at the end of this year their income will be $3,250,000. In this coming year they will need extra financing and expect to issue an additional 150,000 shares of common stock. Thus, one year from now the company will have 650,000 common shares outstanding. 1)Assuming the company’s price to earnings ratio remains at its current level, what will be the company’s stock price one year from now? 2)The PE ratio is a very common method used by investors to get a quick calculation on the market’s perception of a company. Evaluate the formula used to calculate the PE ratio focusing on the limitations of this method of valuation?

Lightbridge corporation has 500,000 shares of common stock that currently trade for $40 per share. The net income reported for last year is $2,000,000. Their expansion is expected to continue, and they estimate that at the end of this year their income will be $3,250,000. In this coming year they will need extra financing and expect to issue an additional 150,000 shares of common stock. Thus, one year from now the company will have 650,000 common shares outstanding. 1)Assuming the company’s price to earnings ratio remains at its current level, what will be the company’s stock price one year from now? 2)The PE ratio is a very common method used by investors to get a quick calculation on the market’s perception of a company. Evaluate the formula used to calculate the PE ratio focusing on the limitations of this method of valuation?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 20P

See similar textbooks

Similar questions

The Link Resport & Spa Company has 75,000 shares of stock outstanding. The company is expected to have total earnings next year of $500,000. The company plans to reinvest $275,000 in projects earning an (equity) return of 15%, and to return the remainder of its earnings to shareholders in the form of dividends or stock repurchases. The first dividend or repurchse payments will be made exactly one year from today. In all future years, the market expects the company's reinvestment rate and the return on reinvested earnings to remain constant. The required return on equity is 12%. What is the value of the firm today, if it 1.) uses the remaining $225,000 to pay dividends, and will continue this payout policy (as a percent of earnings) in future years? 2) uses 40% of its annual payout to repurchase stock, and uses the remainder to pay divdends (and will continue this policy in future years)? Assume that the firm will use the remaining $225,000 to pay dividends (and will continue this…
Lightbridge corporation has 500,000 shares of common stock that currently trade for $40 per share. The net income reported for last year is $2,000,000. Their expansion is expected to continue, and they estimate that at the end of this year their income will be $3,250,000. In this coming year they will need extra financing and expect to issue an additional 150,000 shares of common stock. Thus, one year from now the company will have 650,000 common shares outstanding. Assuming the company’s price to earnings ratio remains at its current level, what will be the company’s stock price one year from now?
Derry Corporation is expected to have an EBIT of $2,800,000 next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $125,000, and $165,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $14,500,000 in debt and 950,000 shares outstanding. At Year 5, you believe that the company's sales will be $22,260,000 and the appropriate price-sales ratio is 3.1. The company's WACC is 9.4 percent and the tax rate is 25 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price
Derry Corporation is expected to have an EBIT of $21 million next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $80,000, and $120,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $10.4 million in debt and 750,000 shares outstanding. You believe that in Year 5 sales will be $23.7 million and the appropriate price-sales ratio is 2.9. The company's WACC is 8.5 percent and the tax rate is 21 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price
Derry Corporation is expected to have an EBIT of $2,300,000 next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $100,000, and $140,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $12,000,000 in debt and 1,000,000 shares outstanding. At Year 5, you believe that the company's sales will be $18,910,000 and the appropriate price-sales ratio is 2.5. The company’s WACC is 8.8 percent and the tax rate is 25 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Share price $26.94selected answer incorrect
Pearl Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $105,000, and $145,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $12,500,000 in debt and 1,050,000 shares outstanding. At Year 5, you believe that the company's sales will be $20,400,000 and the appropriate price-sales ratio is 2.6. The company’s WACC is 8.9 percent and the tax rate is 21 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Derry Corporation is expected to have an EBIT of $3,100,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $245,000, $150,000, and $250,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $19,500,000 in debt and 860,000 shares outstanding. At Year 5, you believe that the company's sales will be $28,700,000 and the appropriate price-sales ratio is 3.4. The company's WACC is 9.7 percent and the tax rate is 23 percent. What is the price per share of the company's stock? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Share price
Pearl Corp. is expected to have an EBIT of $1,900,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $80,000, and $120,000, respectively. All are expected to grow at 15 percent per year for four years. The company currently has $10,000,000 in debt and 800,000 shares outstanding. At Year 5, you believe that the company's sales will be $13,620,000 and the appropriate price-sales ratio is 2.1. The company’s WACC is 8.4 percent and the tax rate is 21 percent. What is the price per share of the company's stock?
Ferrell Inc. recently reported net income of $8 million. It has 710,000 shares of common stock, which currently trades at $57 a share. Ferrell continues to expand and anticipates that 1 year from now, its net income will be $13.6 million. Over the next year, it also anticipates issuing an additional 248,500 shares of stock so that 1 year from now it will have 958,500 shares of common stock. Assuming Ferrell's price/earnings ratio remains at its current level, what will be its stock price 1 year from now? Do not round intermediate calculations. Round your answer to the nearest cent.
Epsilon Corporation will be purchasing 2,000 shares of XYZ Corporation.Last year, annual dividends was P40. Forecasted dividends is P45 for thecurrent year and P51 for the next year. After which, dividends are expectedto increase by 5% each year. Assuming XYZ provides an overall annual return of 20%, how much should Epsilon Corporation pay for these shares?
Derry Corporation is expected to have an EBIT of $2,600,000 next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $115,000, and $155,000, respectively. All are expected to grow at 16 percent per year for four years. The company currently has $13,500,000 in debt and 1,150,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3 percent indefinitely. The company's WACC is 9.2 percent and the tax rate is 23 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Share price $ 41.86
Derry Corporation is expected to have an EBIT of $3,300,000 next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $150,000, and $190,000, respectively. All are expected to grow at 17 percent per year for four years. The company currently has $17,000,000 in debt and 1,500,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.9 percent and the tax rate is 25 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Please avoid answers in images thank you