Answer:
Total PV= $140,465.69
Explanation:
Giving the following information:
Cash flows:
Cf1= $18,000
Cf2= $26,500
Cf3= $46,000
Cf4= $69,000
The appropriate interest rate is 4.3 percent.
To calculate the present value, we need to apply the following formula on each cash flow:
PV= FV/(1+i)^n
Cf1= 18,000/1.043= 17,257.91
Cf2= 26,500/1.043^2= 24,360
Cf3= 46,000/1.043^3= 40,541.97
Cf4= 69,000/1.043^4= 58,305.81
Total PV= $140,465.69
Which account would be listed on a post-closing trial balance?
a. Sales Revenue
b. Depreciation Expense
c. Retained Earnings
d. Income Tax Expense.
Answer: c. Retained Earnings
Explanation:
The post-closing trial balance reflects balance sheet items that do not have a $0 balance in them when a period has ended and is prepared after the temporary accounts have been closed off. The purpose is to make sure that the debits equal the credits.
As there are no temporary accounts, all income statement items will have been closed off and moved to the Retained earnings account which will reflect the total for the income statement for the year. The only account that will be listed in the post-closing trial balance therefore will be the Retained earnings account.
Straker Industries estimated its short-run costs using a U-shaped average variable cost function of the form and obtained the following resultsDEPENDENT VARIABLE: AVC R-SQUARE F-RATIO P-VALUE ON FOBSERVATIONS: 35 0.8713 108.3 0.0001VARIABLE PARAMETER ESTIMATE STANDARD ERROR T-RATIO P-VALUE INTERCEPT 43.40 13.80 3.14 0.0036Q -2.80 0.90 -3.11 0.0039Q2 0.20 0.05 4.00 0.0004What is the estimated equation for average variable cost (AVC)?What is the estimated equation for short-run marginal cost (SMC)?What is the estimated equation for total variable cost (TVC)?At what level of output is AVC at its minimum point for Straker Industries?If Straker Industries produces 20 units of output, what is its estimated TVC, AVC and SMC?
Answer:
Note: The organized table is attached as picture below
i. What is the estimated equation for average variable cost (AVC)?
Intercept value = 43.40, Parameter estimates of Q and Q2 = -2.80 & 0.20 respectively.
Hence, the estimated equation for AVC is:
AVC = 43.40 - 2.80Q + 0.20Q2
ii. What is the estimated equation for total variable cost (TVC)?
Similarly, the estimated equation for TVC is
= AVC * Q
= 43.40Q - 2.80Q2 + 0.20Q3
iii. At what level of output is AVC at its minimum point for Straker Industries?
AVC will attain its minimum value when its derivative is set = 0. This occurs when:
-2.80 = -0.40Q
Q = 7.
iv. What is the estimated equation for short-run marginal cost (SMC)?
SMC is the derivative of TVC, its estimated equation is given by:
= 43.40 - 5.60Q + 0.60Q2
iv. If Straker Industries produces 20 units of output, what is its estimated TVC, AVC and SMC?
TVC = 43.40Q - 2.80Q^2 + 0.20Q^3
TVC = 43.40(20) - 2.80(20)^2 + 0.20(20)^3
TVC = 868 - 1120 + 1600
TVC = 1348
At 20 unit of output, its estimated TVC is 1348
AVC = 43.40 - 2.80Q + 0.20Q^2
AVC = 43.40 - 2.80(20) + 0.20(20)^2
AVC = 43.40 - 56 + 80
AVC = 67.4
At 20 unit of output, its estimated AVC is 67.4
SMC = 43.40 - 5.60Q + 0.60Q^2
SMC = 43.40 - 5.60(20) + 0.60(20)^2
SMC = 43.40 - 112 + 240
SMC = 171.4
At 20 unit of output, its estimated SMC is 171.4.
The adjusted trial balance of Pacific Scientific Corporation on December 31, 2021, the end of the company’s fiscal year, contained the following income statement items ($ in millions): sales revenue, $2,200; cost of goods sold, $1,440; selling expense, $215; general and administrative expense, $205; interest expense, $45; and gain on sale of investments, $85. Income tax expense has not yet been recorded. The income tax rate is 25%. Assume the company’s accountant prepared a multiple-step income statement. a. What amount would appear in that statement for operating income? b. What amount would appear in that statement for nonoperating income?
Answer:
A. $340 million
B. $40 million
Explanation:
A. Calculation for the amount that would appear in that statement for operating income
Sales revenue $2,200
Less: Cost of goods sold ($1,440)
Selling expense ($215)
General and administrative expense ($205)
Operating income $340 million
Therefore the amount that would appear in that statement for operating income will be $340 million
B. Calculation for the amount that would appear in that statement for non operating income
Interest expense $45
Less Gain on sale of investments $85
Non-operating income $40 million
Therefore the amount that would appear in that statement for nonoperating income will be $40 million
Sampson Corp. had 500,000 shares of common stock outstanding at the beginning of the year. The average market price was $20. On April 1, Sampson issued 100,000 shares of $1000 par value 10 percent preferred stock. On July 1, Sampson issued 200,000 warrants to purchase 10 shares of common stock each at $22 per share. On October 1, Sampson repurchased 60,000 of common stock as treasury stock for $15 per share (EPS) was:
a. 515,000.
b. 600,000.
c. 485,000.
Answer:
c. 485,000
Explanation:
[(500,000 × 12) − (60,000 × 3)] / 12 = 485,000
Pigot Corporation uses job costing and has two production departments, M and A. Budgeted manufacturing costs for the year are as follows: Dept. MDept. A Direct materials$718,000 $118,000 Direct labor 218,000 836,000 Factory overhead 654,000 418,000 The actual direct materials and direct labor costs charged to Job. No. 432 during the year were as follows: Direct materials $58,000 Direct labor: Department M$26,000 Department A 30,000 56,000 Pigot applies manufacturing overhead to production orders on the basis of direct labor cost using departmental rates predetermined at the beginning of the year based on the annual budget. The total cost associated with Job. No. 432 for the year should be:
Answer:
Total cost= $207,000
Explanation:
Giving the following information:
Budgeted manufacturing costs Dept. M Dept. A:
Direct labor 218,000 836,000
Factory overhead 654,000 418,000
Job. No. 432:
Direct materials $58,000
Direct labor: Department M$26,000 Department A 30,000
First, we need to determine the predetermined overhead rate for each department:
Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base
Departement M= 654,000/218,000= $3 per direct labor dollar
Department A= 418,000/836,000= $0.5 per direct labor dollar
Now, we can calculate the total cost:
Total cost= direct material + direct labor + allocated overhead:
Total cost= 58,000 + 56,000 + (3*26,000 + 0.5*30,000)
Total cost= $207,000
Apple Tree Enterprises allocated overhead based on direct material cost and has a predetermined overhead rate of 160%. During the current period, direct labor cost is $67,000 and direct materials cost is $73,000. In the current period, determine the amount of overhead to be applied by Apple Tree Enterprises.
Answer:
Allocated MOH= $116,800
Explanation:
Giving the following information:
predetermined overhead rate= 160% of direct material
Direct materials= $73,000
To calculate the allocated overhead, we need to use the following formula:
Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base
Allocated MOH= 1.6*73,000
Allocated MOH= $116,800
Purple Dog Pet Supply Inc. (PDPS) released its annual results and financial statements. Eleanor is reading the summary in the business pages of today’s paper. In its annual report this year PDPS reported a net income of $180,000. Last year, the company reported a retained earnings balance of $510,000, whereas this year it increased to $600,000. How much was paid out in dividends this year?
Answer:
$90,000
Explanation:
Purple dog pet supply released its annual results and financial statement
It reported a net income of $180,000 this year
Last year the company reported a retained earnings of $510,000
This year it increased to $600,000
Therefore the amount that was paid out in dividend this year can be calculated as follows
= $180,000 + $510,000-($600,000)
= $690,000-$600,000
= $90,000
Hence the amount that was paid out in dividend this year is $90,000
What should be Alicia's first step? What should be Alicia's first step? Multiple Choice set goals for hiring new staff check with her colleagues in the industry for possible new hires forecast labor supply and demand within the company once video work starts take out a recruitment ad in the local newspaper get together with company execs for a planning session
The complete question reads;
As you read the following case, think about how Alicia Brooks, HR manager at Edu-Films, needs to take a balanced approach to hiring the right amount of staff for the company's next big project. In this exercise, please read the mini-case and answer the questions that follow. Edu-Films is a small design company that writes and produces videos for the elementary and high school education market. The company is in the final stages of negotiating a new contract with a U.S. publisher to create 40 videos for a new K-12 math series, and the videos need to be available by the spring of 2017. Business for Edu-Films has been slow over the past three years, and the company has kept staff levels to a minimum. Mindful of the company's flat fiscal results over the last couple of years but understanding that new hires must be ready to go once the agreement is signed, HR manager Alicia Brooks must put together a cohesive hiring plan.
1). What should be Alicia's first step?
A). Check with her colleagues in the industry for possible new hires.
B). Get together with company execs for a planning session.
C). Set goals for hiring new staff.
D). Forecast labor supply and demand within the company once video work starts.
E). Take out a recruitment ad in the local newspaper.
Answer:
C). Set goals for hiring new staff.
Explanation:
A goal refers to expected results or achievement which requires effort. Remember we are told, "the videos need to be available by the spring of 2017". Meeting this deadline should be the ultimate goal, and so Alicia's first step should be to set goals for hiring new staff.
By so doing she can get the expected results.
Philip Morris expects the sales for his clothing company to be $670,000 next year. Philip notes that net assets (Assets − Liabilities) will remain unchanged. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $270,000 in the bank. What will Philip's ending cash balance be?
Answer:
the ending cash balance is $330,300
Explanation:
The computation of the ending cash balance is shown below:
Ending cash balance = Opening cash balance + Profit
= $270,000 + (9% × $670,000)
= $270,000 + $60,300
= $330,300
We simply added the opening cash balance and the profit so that the ending cash balance could come
Hence, the ending cash balance is $330,300
The following standard costs pertain to a component part manufactured by Bor Company: An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each. The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision. In the decision to "make or buy," what is the relevant unit cost to make the part internally?
Answer:
$30
Explanation:
The computation of relevant unit cost to make the part internally is shown below:-
Relevant cost of making part = Direct material + Direct labor + Manufacturing overhead
= $4 + $10 + ($40 - (100% - $60%)
= $4 + $10 + ($40 - 40%)
= $4 + $10 + $16
= $30
So, for computing the relevant unit cost to make the part internally we simply applied the above formula.
At the annual shareholders meeting of the company you work for, the CEO points out that after a record year of cash flow, the company plans to spend significant amounts of that cash in a stock repurchase program. What is one reason the Board of Directors and executive leadership of a company would use its excess cash flow to buy back its own shares?
Answer:
increase their ownership amount of the company
Explanation:
The main reason why shareholders would do this is to increase their ownership amount of the company. Each company only has a certain number of shares available, the entirety of this amount makes up the entire company. The more shares you own, the more of the company you own. Therefore, when there is excess cash flow many shareholders buyback more of their stocks in order to own more of the company, which they think will continue to grow and bring them more profits.
Your strengths represent the best you have to offer in ______ others.a) controlling.
b) influencing.
c) manipulating.d) controlling and manipulating.
Why is a facility location so important to manufacturers
g If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean but will likely only be useful in 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today?
Answer:
a. What is likely to happen to the supply of oil today?
The supply of oil will increase today because the oil executives will no longer be worried about limiting supply on account of the current reserves running out because the oil reserves discovered that will be ready in 10 years will become the new supply source when the current reserves run out.
b. What is the likely equilibrium impact on the price and quantity of oil today?
As the supply oil will increase in the present, the Equilibrium quantity will increase.
With an increase in the equilibrium quantity, prices will decrease as oil will no longer be as scarce.
You manage an equity fund with an expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund. What is the reward-to-volatility (Sharpe) ratio for the equity fund
Answer: 0.71
Explanation:
The following can be deduced from the question:
Expected risk premium = 10%
Standard deviation = 14%.
Treasury bills rate = 6%.
The expected return of equity will be:
= 10% + 6%
= 16%
The reward to voltality ratio is calculated as:
(expected return - risk free rate )/standard deviation
= (16% -6%)/14%
= 10%/14%
=0.1/0.14
= 0.71
Identify whether a debit or credit yields the indicated change for each of the following accounts %
a. To increase Prepaid Rent
b. To decrease Prepaid Parking
c. To increase Repairs Expense
d. To increase Commission Revenue
e. To decrease Rent Payable
f. To decrease Supplies
g. To increase Unearned Revenue
h. To decrease Equipment
i. To increase Retained Eamings
j. To increase Store Supplies
Answer:
a. To increase Prepaid Rent ⇒ DEBIT, since this is an asset account, in order to increase it you must debit it.
b. To decrease Prepaid Parking ⇒ CREDIT, since this is an asset account, in order to decrease it you must credit it.
c. To increase Repairs Expense ⇒ DEBIT, since this is an expense account, in order to increase it you must debit it.
d. To increase Commission Revenue ⇒ CREDIT, since this is a revenue account, in order to increase it you must credit it.
e. To decrease Rent Payable ⇒ DEBIT, since this is a liability account, in order to decrease it you must debit it.
f. To decrease Supplies ⇒ CREDIT, since this is an asset account, in order to decrease it you must credit it.
g. To increase Unearned Revenue ⇒ CREDIT, since this is a liability account, in order to increase it you must credit it.
h. To decrease Equipment ⇒ DEBIT, since this is an asset account, in order to increase it you must debit it.
i. To increase Retained Earnings ⇒ CREDIT, since this is an equity account, in order to increase it you must credit it.
j. To increase Store Supplies ⇒ DEBIT, since this is an asset account, in order to increase it you must debit it.
Which of the following is NOT considered a step in activity-based costing?
A. Trace or allocate overhead costs to activity cost pools.
B. Identify and classify the major activities involved in the manufacture of specific products.
C. Identify a single overhead rate as the predetermined overhead rate.
. The overhead traced or allocated to the activity cost pools is assigned to products using cost drivers.
Answer: C. Identify a single overhead rate as the predetermined overhead rate.
Explanation:
Activity based costing works by assigning indirect and overhead costs to the activities that caused the costs to be incurred and then assigning those activities to the products those activities helped produce such that indirect and overhead costing is more accurate.
The steps involved include, tracing and allocating overhead costs to activity coat pools, identifying and classifying the major activities involved in the manufacture of specific products, and assigning overhead costs to products based on cost drivers.
It does not include identifying a single overhead rate as the predetermined overhead rate. This is a step is in Standard Costing.
Which of the following is an example of an equity investment?
(Select the best answer.)
A company bond
A company's stock
A government bond
A loan
Answer:
A company's stock
Explanation:
There are two main capital structure i.e. debt and the equity. The debt is the loan which is to be borrowed by the individual or a company in order to raise a capital. While the other one is equity in which it shows the ownership stake in the company also it involves the securities than should be traded in the stock markets
While going through the options given, the second option is correct as other options are the examples of debt and the same is not considered for an equity investment
A company is considering two designs for a machine in its manufacturing line. The first, called machine A, will cost $160000 in fixed costs and will cost $80 per unit in variable costs, for each unit it produces. The second, called B, will cost $270000 in fixed costs and will cost $2 per unit in variable costs, for each unit it produces. At what volume of production will the two machines cost the same
Answer:
The indifference point is 1,410 units
Explanation:
Giving the following information:
Machine A:
Fixed costs= $160,000
Unitary variable cost= $80
Machine B:
Fixed costs= $270,000
Unitary variable cost= $2
First, we need to structure the total cost formula for each machine:
Machine A= 160,000 + 80x
Machine B= 270,000 + 2x
x= number of units
Now, we equal both formulas and isolate x:
160,000 + 80x = 270,000 + 2x
78x = 110,000
x= 110,000/78
x= 1,410 units
The indifference point is 1,410 units
Flannigan Company manufactures and sells a single product that sells for $320 per unit; variable costs are $176. Annual fixed costs are $927,000. Current sales volume is $4,260,000. Flannigan Company management targets an annual pre-tax income of $1,185,000. Compute the dollar sales to earn the target pre-tax net income.
Answer:
Break-even point (dollars)= $4,693,333.33
Explanation:
Giving the following information:
Selling price= $320 per unit
Unitary variable costs= $176
Annual fixed costs= $927,000
Desired profit= $1,185,000
To calculate the sales in dollars required, we need to use the break-even point in dollars formula:
Break-even point (dollars)= (fixed costs + desired profit) / contribution margin ratio
Break-even point (dollars)= (927,000 + 1,185,000) / [(320-176) / 320]
Break-even point (dollars)= 2,112,000 / 0.45
Break-even point (dollars)= $4,693,333.33
A company purchased a building for $900,000 by obtaining a 30-year mortgage payable. Assume the lending arrangement specifies that the company will pay $20,000 of the principal over the first year, $30,000 in the second year, and the remainder evenly over the final 28 years. What amount of the $900,000 would be classified as a long-term liability at the time the mortgage payable is obtained
Answer:
A total of $880,000 would be classifiad as a long-term liability.
Explanation:
Long-term liabilities are also known as non-current liabilities.
Long-term liabilities consist of all the liabilities that are not due within a year, in other words, that can be paid off for a period of time longer than six months.
In this case, only $20,000 of principal of a total of $900,000 are paid over the first year. The remaining principal payment of $880,000 (plus any interest), is to be paid over the next 29 years, and for this reason, these payments will be recorded in the balance sheet as long-term or non-current liabilities.
39. You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?
Answer:
PV= $1,311.17
Explanation:
Giving the following information:
Future Value (FV)= $5,000
Number of periods (n)= 25 years
Interest rate (i)= 5.5% compounded annually
To calculate the present value (PV), we need to use the following formula:
PV= FV / (1+i)^n
PV= 5,000 / 1.055^25
PV= $1,311.17
"Consider a C corporation. The corporation earns $13 per share before taxes. After the corporation has paid its corresponding taxes, it will distribute 0% of its earnings to its shareholders as a dividend. The corporate tax rate is 42%, the tax rate on dividend income is 27%, and the personal income tax rate is set at 20%. What are the shareholder's earnings from the corporation after all corresponding taxes are paid?"
Answer:
$1.41144
Explanation:
Assuming that distribution of its earning to its shareholder is 30% as against the 0% which is likely a mistake because the tax rate on dividend income of 27% is also given in the question
Earning before tax $13
Less: Corporation tax $5.46
($13 * 42%)
Earnings after tax $7.54
Dividend distribution = $7.54 * 30% = $2.262
After tax dividend = $2.262 * (1-0.27) = $2.262 * 0.78 = $1.7643
Shareholder earnings after Income tax = $1.7643 * (1 - 0.20) = $1.7643 * 0.80 = $1.41144
Therefore, the Shareholder earnings from the Corporation assuming the distribution of its earning to its shareholder is 30% is $1.41144
The minimum acceptable expected rate of return on a project of a specific risk is the:________
A. project cost of capital.
B. company cost of capital.
C. risk-free rate of return.
D. project beta times market risk premium.
Answer: A. project cost of capital.
Explanation:
The project cost of capital is the minimum expected rate of project given the type of risk that is attached to it.
When a project is of a certain risk, the company will need a certain rate of return to compensate it for that risk.
This rate is the cost of capital and it is usually based on the company's Weighted Average Cost of Capital (WACC) which measure the cost the company incurs when using equity and debt to raise capital.
The project cost of capital will be a rate that compensates the company enough to enable it compensate its capital providers.
Colorado Rocky Cookie Company offers credit terms to its customers. At the end of 2016, accounts receivable totaled $720,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $51,000 at the beginning of 2016 and $30,500 in receivables were written off during the year as uncollectible. Also, $3,100 in cash was received in December from a customer whose account previously had been written off. The company estimates bad debts by applying a percentage of 10% to accounts receivable at the end of the year. Required: 1. Prepare journal entries to record the write-off of receivables, the collection of $3,100 for previously written off receivables, and the year-end adjusting entry for bad debt expense. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Answer:
Journal
Date Account Titles and Explanation Debit Credit
Allowance for uncollectible accounts $30,500
Accounts Receivables $30,500
(To write off uncollectibles during the year)
Journal
Date Account Titles and Explanation Debit Credit
Account receivables $3,100
Allowance for uncollectible accounts $3,100
(To reinstate receivables written off earlier)
Journal
Date Account Titles and Explanation Debit Credit
Cash $3,100
Account receivables $3,100
(To record the recovery of bad debts)
Journal
Date Account Titles and Explanation Debit Credit
Bad debt expenses $48,000
Allowance for uncollectible accounts $48,000
(To record bad debts expenses)
Workings
Closing allowance = Opening allowance - Receivables written off + Receivables reinstated = $51,000 - $30,500 + $3,100 = $23,600
Expenses Bad debt = Receivables at the end of 2016 * Estimated percentage = $720,000 * 10% = $72,000
Allowance to be created = Estimated bad debts - Balance of Allowance at year end = $72,000 - $23,600 = $48,400
A scatter graph is used to test the assumption that the relationship between cost and activity level is ________. A. curvilinear B. cyclical C. unpredictable D. linear
Answer:
Option D (linear) is the right approach.
Explanation:
The scatter graph seems to be a graphic method to determine the relationship regarding expense and degree of operation. It could be used to evaluate the expense behavior of adjusting this same degree of operation. It is being used to verify the system suitability or linearity statement that is true.Some other decisions taken are not relevant to the situation in question. Although it is indeed the best option.
he following cost data pertain to the operations of Brentwood Department Stores, Inc., for the month of May: Corporate legal office salaries $ 69,000 Shoe Department cost of sales-Brentwood Store $ 87,000 Corporate headquarters building lease $ 86,000 Store manager's salary-Brentwood Store $ 14,700 Shoe Department sales commissions-Brentwood Store $ 8,700 Store utilities-Brentwood Store $ 13,700 Shoe Department manager's salary-Brentwood Store $ 4,700 Central warehouse lease cost $ 11,700 Janitorial costs-Brentwood Store $ 11,700 The Brentwood Store is just one of many stores owned and operated by the company. The Shoe Department is one of many departments at the Brentwood Store. The central warehouse serves all of the company's stores. What is the total amount of the costs listed above that are NOT direct costs of the Brentwood Store
Answer:
The total amount of the costs listed above that are NOT direct costs of the Brent-wood Store is $166,700
Explanation:
The total amount of the costs listed above that are NOT direct costs of the Brent-wood Store is as listed below:
Details Amount
Corporate Legal Office Salaries $69,000
Corporate Headquarters Building lease $86,000
Central Warehouse lease cost $11,700
Total non-direct cost of the store $166,700
What is the term for the illegal practice of using special
knowledge about a firm for profit or gain?
Answer:
Insider trading.Explanation:
Illegal practice of using special knowledge about a firm for profit or gain is called insider trading
Galehouse Gas Stations Inc. expects sales to increase from $1,510,000 to $1,710,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 30 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends. a. What effect will this growth have on funds?
Answer:
Cash position reduces by -$24,760
Explanation:
If Gatehouse sales increases as expected the increase will be
1,710,000 - 1,510,000 = $200,000
Net assets is expected to represent 50% of sales, so this sales increase is expected to have Asset Buildup of:
0.50 * 200,000 = $100,000
Asset has a negative balance so it is -$100,000
Return on sales is 8% of the new sales value:
0.080 * 1,710,000 = $136,800 (profit)
45% of profit is paid out as dividend
0.45 * 136,800= -$61,560
It is negative as it represents cash going out
Total cash position = -100,000 + 136,800 - 61,560
Total cash position = -$24,760
Cash position reduces by -$24,760
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the "terminal" stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 10 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return is 11 percent. a. What is the target stock price in five years? b. What is the stock price today?
Answer and Explanation:
The computation is shown below:
a. The Target stock price in five years is
As we know that
Target stock price in five years = Earnings per share in Year 5 × Benchmark P/E Ratio
where,
Earnings per share in Year 5 is
= D5 ÷ Pay-out Ratio
Now
D0 = $1.15 per share
D1 = $1.15 × 1.10 = $1.265per share
D2 = $1.265 × 1.10 = $ 1.3915
D3 = $1.3915 × 1.10 = $1.53065
D4 = $1.53065 × 1.10 = $1.683715
D5 = $1.683715 x 1.10 = $1.85209
Now
Earnings per share in Year 5 is
= D5 ÷ Pay-out Ratio
= $1.85209 ÷ 0.40
= $4.630225
Now
The Target stock price in five years is
= Earnings per share in Year 5 × Benchmark P/E Ratio
= $4.630225 × 19 Times
= $87.97;
b. Now the stock price today is to be shown in the spreadsheet below