You are a corporate finance analyst at a investment management firm, which is looking at making an investment into the company called Boston Turkey Inc. The company, Boston Turkey Inc., has been in existence for only two years, and its stock is currently trading at $20 per share (There are 100,000 shares outstanding.) The following are the most recent financial statements of the company: Further company and market information is indicated below: Current Numbers:
Earnings per share = $ 2.40
Net Income = $240,000
Dividends per share = $ 1.00
Interest Expenses = $100,000
Market price per share = $ 20
Market Value of Debt = 1,250,000
Number of shares = 100,000
Book Value of Equity = $1,500,000
Cash is only Current Asset
Tax Rate = 40%
Boston Turkey expects its revenues to grow 10% next 5 years, and its expenses to remain at the same percentage as indicated in the base year. The depreciation and interest expenses will remain unchanged at $100,000 next year. The working capital, as a percentage of revenue, will remain unchanged. Develop the next 5 years worth of income statement and common size it to the base year Income Statement-
BASE YEAR Revenues$ 1,000,000
Expenses$400,000
Depreciation$100,000
EBIT$500,000-
Interest Expense$100,000
Taxable Income$400,000-
Tax$160,000
Net Income$240,000 i
Assume in your revision year that the company will maintain the perpetual net income for the going remaining years at a market discount rate of 12%. The firm expects to maintain the dividend payout policy relative to its net income each year going forward until the final year of the investment whereafter it will pay a fixed $1.85 per share into perpetuity Questions to answer:
1. You are looking to invest $200,000 for the firm for a period of 5 years, how many shares do you purchase a part of the purchase price?
2. What is the dividend payout percentage for the company in the base year?
3. What is the nominal dollar value of dividend earnings for the company in the third year of the investment?
4. If the company is selling for a price to earning ratio of 8.33 in the base year and that P/E multiple is maintained till the 5th year, what will be the price of the stock in the fifth year of the investment horizon?
5. If your investment firm has a 8% preputial discount rate relating to the firm dividend for the perpetuity value of the company, what is the per share value of the company in the 5th year of the investment horizon?
6. If you firm has a hurdle rate of 10% to the make the investment, would you make the investment?
7. What is the NPV value for this investment at a 10% discount rate?
8. What is the IRR for this investment?
9. What is the Enterprise Value of the investment in the base year?