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5.20
a. If 40 percent of earnings are paid out in dividends and the discount rate is
11 percent, determine the present value of dividends. Round all values you
compute to two places to the right of the decimal point throughout this
problem.
b. If it is anticipated that the stock will trade at a P/E of 15 times 2012
earnings, determine the stock’s price at that point in time and discount back
the stock price for five years at 11 percent.
c. Add together parts a andb to determine the stock price under this combined
earnings and dividend model.
6. A company has $200,000 in inventory, which represents 20 percent of
current assets. Current assets represent 50 percent of total assets. Total debt
represents 30 percent of total assets. What is stockholders’ equity?
7. In the year 2007, the average firm in the S&P 500 Index had a total market
value of fives times stockholders’ equity (book value). Assume a firm had
total assets of $10 million, total debt of $6 million, and net income of
$600,000.
a. What is the percent return on equity?
b. What is the percent return on total market value? Does this appear to be an
adequate return on the actual market value of the firm?
8. A firm has the following financial data:
Current assets
$600,000
Fixed assets 400,000
Current liabilities 300,000