a Which one of these ratios is commonly used to compute the horizorn a Stock Pri

Question

a Which one of these ratios is commonly used to compute the horizorn a Stock Price/EPS b Stock Price/Sales e Book equity/ROE d Enrity Value/EBITDA e Mkt Value of equity/ROE. s otter Fail Power has been in business 125 years. it expects to pay a comre The commonsk premium of now (Fix of $7 a share, and continue at that level forever, wit beta of 1.325 and market conditions result in a risk free rate of percent. At what price should the common stock sell? pay a common stock dividend a year from of 8 of 5 percent and a market risk premium S5000 b $ 52.50 $81.67 d $126.00 e. None of the above. Specify: $ , and it is using the AFN equation A company expects sales to increase during the coming year to forecast the cause the AFN (external fu additional capital that it must raise. Which of the following conditions would a. The company forecasts that it will have excess capacity. b. The company's profit margin increases e. The company increases its dividend payout ratio. d The company's profit margin decreases. e. More than one of the above will increase EFN

Explanation / Answer

1

Entiity Vlaue/EBITDA

2

Cost of equity=risk free+beta*marketriskpremium=5+1.125*8=15%

Price of stock=Next Dividend/cost of equity=7/0.15=46.667

3

AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings

Retained earnings will decrease in case of lower profit margins and higher dividend payout

Hence, AFN will increase in case of lower profit margins and higher dividend payout

Option c,d

Hence, Option E

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