Financial statements reflect only book values of the data that analysts use to e
ID: 2745004 • Letter: F
Question
Financial statements reflect only book values of the data that analysts use to evaluate a company's performance. To determine if a firm's earnings, after taxes but before the payment of interest and dividends, are sufficient to compensate both the firm's bondholders and shareholders, Stern Stewart Management Services developed an analytical technique called economic value added (EVA). EVA effectively measures the amount of shareholder wealth that the firm's management has added to the value of the firm during a period of time. If EVA is positive, then management has added value, while a negative value indicates that the firm's managers reduced the firm's value and shareholders might have earned more value by investing in some other investment with the same level of risk. Consider this case: Last year, Jackson Tires reported net sales of $80 million and total operating costs (including depreciation) of $52 million. Jackson Tires has $115 million of investor-supplied capital, which has an after-tax cost of 12.5%. If Jackson Tires's tax rate is 40%, how much value did its management create or lose for the firm during the year? $33.63 million $54.63 million $0.67 million $2.43 million You have taken a job as an entry-level analyst, and your boss has asked you to find the expected value of Dual Purposes Products Co.'s stock. As you were doing your research, you found out that Dual Purposes Products Co. just paid a dividend (D_0) of $3.20. The firm has experienced consistent growth of 7% for the last couple of years, and you believe that the firm will continue to grow at the same rate in the future. If investors require a return of 11% on Dual Purposes Products Co.'s stock, what is the expected value of the company's stock? $94.16 $68.48 $85.60 $77.04 What would be the change in the expected value of Dual Purposes Products Co.'s stock if investors required a return of 14% on the company's stock?Explanation / Answer
Jackson Case
Answer = 2.43 million
Working notes for the above answer is as under
EBIT = 80M-52M
= 28MEVA
= 28M x (1-0.4) – 115M x 0.125
= 2.425 M
=2.43 Million
Case -2)
Answer = $ 85.6
Working notes for the above answer is as under
Explanation:
Close A the reason behind this is Pandar Corp.s growth rate is expected to remain constant, you can use the constant growth stock valuationformula to solve for the current expected value of the companys stock price.
P3 = $3.20(1 + 0.07) / (0.11-0.07)
=3.427/0.04
=$ 85.6
$85.68
Based on the information given in the problem, the expected value of Pandar Corp/ stock is
P3 = $3.20(1 + 0.07) / (0.14-0.07)
=3.427/0.07
=$ 48.91
$48.91
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