Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 12, Problem 6QE
Suppose you are valuing a healthy, growing, profitable firm and you project that the firm will generate negative
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A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She
anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she
anticipates 15 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio
will go up to 31 percent and will eventually reach 55 percent during the maturity stage (IV).
Anthe
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during
each stage. (Leave no cells blank - be certain to enter "O" wherever required. Do not round intermediate calculations and round
your answers to 2 decimal places.)
Stage I
Stage II
Stage III
Stage IV
Stage I
Stage II
Stage III
Stage IV
$ 0.35
1.60
2.70
3.60
Aftertax income
Dividends
b. Assume in Stage IV that an investor owns 310 shares and is in a 15 percent tax…
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She
anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II),
she anticipates 15 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the
payout ratio will go up to 33 percent and will eventually reach 57 percent during the maturity stage (IV).
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any)
during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations
and round your answers to 2 decimal places.)
Stage I
Stage II
Stage III
Stage IV
Stage I
Stage II
Stage III
Stage IV
$ 0.30
1.85
2.60
3.80
Aftertax income
Dividends
b. Assume in Stage IV that an investor owns 335 shares and is in a 15 percent tax…
You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows.(i) What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity? (ii) What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity? (iii) What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
Chapter 12 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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