At the end of its 2015 fiscal year-end Ramos Corporation had 250,000 shares of p
ID: 2730605 • Letter: A
Question
At the end of its 2015 fiscal year-end Ramos Corporation had 250,000 shares of preferred stock outstanding. The preferred stock has a book value of $50 per share. In addition, Ramos paid $120,000 in dividends to preferred shareholders in 2015. Ramos also has $8,500,000 of interest bearing debt outstanding and its after-tax cost of debt is 3.4%. The market value of Ramos Corporation’s 805,000 common shares outstanding at year end is $32,200,000 and the company's cost of common equity is 9%. Ramos paid a $3.00 dividend in 2015. Analysts expect Ramos to increase its dividend payout by 2% annually over the long term. Ramos reported net income of $1,988,000 in 2015. The average PE ratio in Ramos’ industry is 12.8 on a trailing basis. Ramos had a net profit margin of 10.5% and an EBITDA margin of 32.5% in 2015. Required: a. Calculate the value of Ramos stock using the dividend discount model (DDM). Round to the nearest dollar. What can you conclude about the Company’s implied value from the DDM compared to its current market price? b. What is Ramos’ PE ratio? c. Conclude on the Company’s PE ratio relative to its peers and describe what might account for the difference. d. Calculate the Company’s EV / EBITDA multiple. e. What is the total book value of Ramos Corporation’s preferred stock at the end of 2015? f. Estimate the cost of Ramos Corporation’s preferred equity capital. g. Calculate Ramos Corporation’s weighted average cost of capital.
Explanation / Answer
a) The value of Ramos stock using the dividend discount model (DDM):-
Value of stock = Expected dividend / Cost of equity - Growth rate
= 3 / 0.09 - 0.02
= $ 42.86 (approx)
(NOTE):- Dividend of $ 3 given in question is assumed to be including of growth factor.
b) PE Ratio = Market price per share / Earnings Per Share
Market price per share = 32200000 / 805000 = $ 40
Earnings per Share = 1988000 / 805000 = $ 2.47 (approx)
PE Ratio = 40 / 2.47 = 16.19
c) The PE Ratio / PE Multiple of 16.19 in year 2015 is higher that average PE ratio of 12.8 prevailing in the industry. This indicates that the position of company's stock is very good in the market.
e) The total book value of Ramos Corporation’s preferred stock at the end of 2015 = 250000 * 50
= $12500000
(NOTE);- Payment of dividend on preferred stock will diminish the book value per common share.
f) The cost of Ramos Corporation’s preferred equity capital = Preferred dividend / Preferred stock value * 100
= 120000 / 12500000 * 100
= 0.96 %
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