At the end of its 2015 fiscal year-end Ramos Corporation had 250,000 shares of p
ID: 2730610 • 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
answer to A dividend declared 3 growth rate 2% expected dividend 3.06 value of share 43.7142857 market value of shares 32200000 no of shares 805000 market price 40 this share is undervalued as fair value is 43.71 while in market it is trading at 40 answer to b net income 1988000 preferred dividend 120000 earning after preference dividend 1868000 no of shares 805000 EPS 2.32049689 PE ratio 17.2376874 answer no 3 industry PE ratio 12.8 ramos PE ratio 17.2376874 it is greater than industry average and it is good for the company answer no 4 enterprise value 53200000 COST OF EQUITY CAPITAL (EXPECTED DIVIDEND/MARKET PRICE)+GROWTH RATE 2.0765 PERCENT value of equity 32200000 value of debt 8500000 value of preference 12500000 EV/EBITDA 163692308 ANSWER NO 5 COST OF PREFERRED STOCK PREFERENCE DIVIDEND/VALUE OF PREFERENCE SHARES 0.0096 0.96 PERCENT ANSWER NO 6 WEIGHTED AVERAGE COST OF CAPITAL WEIGHTS enterprise value 53200000 1 value of equity 32200000 0.6052632 9 5.447368 value of debt 8500000 0.1597744 3.4 0.543233 value of preference 12500000 0.2349624 0.96 0.225564 WEIGHTED AVERAGE COST OF CAPITAL 6.216165 PERCENT VALUE OF PREFERRED EQUITY 12500000
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