Rite Bite Enterprises sells toothpicks. Gross revenues last year were $9.9 milli
ID: 2772748 • Letter: R
Question
Rite Bite Enterprises sells toothpicks. Gross revenues last year were $9.9 million, and total costs were $5.0 million. Rite Bite has 1.6 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 6 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends
a. If the appropriate discount rate is 16 percent and all cash flows are received at year’s end, what is the price per share of Rite Bite stock?
b. Rite Bite has decided to produce toothbrushes. The project requires an immediate outlay of $18.6 million. In one year, another outlay of $7.6 million will be needed. The year after that, earnings will increase by $5.8 million. That profit level will be maintained in perpetuity. What will the new stock price be if the project is undertaken?
Rite Bite Enterprises sells toothpicks. Gross revenues last year were $9.9 million, and total costs were $5.0 million. Rite Bite has 1.6 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 6 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends
a. If the appropriate discount rate is 16 percent and all cash flows are received at year’s end, what is the price per share of Rite Bite stock?
b. Rite Bite has decided to produce toothbrushes. The project requires an immediate outlay of $18.6 million. In one year, another outlay of $7.6 million will be needed. The year after that, earnings will increase by $5.8 million. That profit level will be maintained in perpetuity. What will the new stock price be if the project is undertaken?
Explanation / Answer
A. Gross revenue : $9.9
total Cost : $5
Total earning : $4.9
Total No of Share : 1.6 Million
Earning pr share : Total earning/Total No of share
EPS : $4.9/1.6 = $3.0625
Discount Rate(Ke) : 16%
Price Earning ratio: 1/Discount rate (Ke)
PE Ratio: 1/16% = 6.25
Market price per share : Earning per share*Price earning Ratio
MPS : $3.0625*6.25 = $19.14
B. Total earning Increased by : $5.8
Existing Earning : $4.9 + $5.8 = $10.7
Total No of Share : 1.6 Million
Earning pr share : Total earning/Total No of share
EPS : $10.7/1.6 = $6.6875
Discount Rate(Ke) : 16%
Price Earning ratio: 1/Discount rate (Ke)
PE Ratio: 1/16% = 6.25
Market price per share : Earning per share*Price earning Ratio
MPS : $6.6875*6.25 = $41.80
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