You have been given the following projections for Cali Corporation for the comin

Question

You have been given the following projections for Cali Corporation for the coming year.

Sales = 10,000 units
Sales price per unit = $12
Variable cost per unit = $6
Fixed costs = $10,000
Long-term debt = $15,000
Interest rate on long-term debt = 8%
Tax rate = 40%
Dividend payout ratio = 60%
Expected long-term growth rate = 8%
Shares of common stock outstanding = 10,000 shares
Beta = 1.4
Current rate on government T-Bonds = 3%
Expected return on the stock market = 8%

Calculate the current price per share for Cali Corporation.

Explanation / Answer

Net Income = (10000*($12 - $6) -$10000 - 8%*$15000) (1-40%) = $29280 EPS = Net income/10000 = $ 2.93 Dividend paid = $2.93 *0.6 = $1.76 Expected return using CAPM = 2% + 1.4 * (7% - 2% ) = 9% Price = $1.76 * (1.06)/(0.09-0.06) = $62.07

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