Chapter 4: Q13I (page 476)
A firm has an ROE of 3%, a debt/equity ratio of .5, a tax rate of 35%, and pays an interest rate of 6% on its debt. What is its operating ROA?
ROE = 4.5%
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The present value of a firm’s projected cash flows are \(15 million. The break-up value of the firm if you were to sell the major assets and divisions separately would be \)20 million. This is an example of what Peter Lynch would call a(n):
a. Stalwart
b. Slow-growth firm
c. Turnaround
d. Asset play
A common stock pays an annual dividend per share of \(2.10. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at \)2.10, what is the value of the stock?
Rio National Corp. is a U.S.-based company and the largest competitor in its industry. Tables 13.5 – 13.8 present financial statements and related information for the company.
Table 13.9 presents relevant industry and market data.
The portfolio manager of a large mutual fund comments to one of the fund’s analysts, Katrina Shaar: “We have been considering the purchase of Rio National Corp. equity shares, so I would like you to analyze the value of the company. To begin, based on
Rio National’s past performance, you can assume that the company will grow at the same rate as the industry.”
a. Calculate the value of a share of Rio National equity on December 31, 2012, using the constant-growth model and the capital asset pricing model.
b. Calculate the sustainable growth rate of Rio National on December 31, 2012. Use 2012 beginning-of-year balance sheet values.
Jand, Inc., currently pays a dividend of \(1.22, which is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the constant-growth dividend discount model is \)32.03, what is the required rate of return?
General Weed killers dominate the chemical weed control market with its patented product Weed-ex. The patent is about to expire, however. What are your forecasts for changes in the industry? Specifically, what will happen to industry prices, sales, the profit prospects of General Weedkillers, and the profit prospects of its competitors?
What stage of the industry life cycle do you think is relevant for the analysis of this market?
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