14. Sarro Shipping, Inc., expects to earn $1.3 million. There are 100,000 shares

Question

14. Sarro Shipping, Inc., expects to earn $1.3 million. There are 100,000 shares of stock outstanding, so earnings per share equal $13 ($1,300,000/100,000). The firm will have an opportunity at date 1 to spend $1,300,000 on a new marketing campaign. The new campaign will increase earnings in every subsequent period by $260,000 (or $ 2.6 per share). The firm’s discount rate is 10 percent. What is the tangible value per share? What is franchise value per share? What is the intrinsic value per share? Please show your work.

Explanation / Answer

Tangible value per share = EPS/cost of equity

                                          = 13 / .10

                                       = $ 130 per share

Franchise value per share = 2.6 / .10 = $ 26 per share

Intrinsic value per share = 130 + 26 = $ 156 per share

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