Question

At the end of 2011, 40% of CARE Software, Inc.'s $1 million in total assets were...

At the end of 2011, 40% of CARE Software, Inc.'s $1 million in total assets were debt-financed. The company's cost of debt was 6 percent, and its cost of equity was 12 percent.2011 EBIT was $200,000, and is expected to remain constant. Income was taxed at 40 percent. The 50,000 shares of common stock outstanding had a year-end 2011 book value of $12.00 per share. The dividend payout ratio was 100%.Calculate the intrinsic value of a share of stock.

Homework Answers

Answer #1

Answer:- Intrinsic value is $17.60.

Calculations

Total Assets = $1000000

Debt(40%of total assets)= $400000

Cost of debt = 6%

Interest amount (400000*6%)= $24000

EBIT 200000
Internet (24000)
EBT 176000
Tax@40% (70400)
Earnings for equity share holders 105600
No of equty share holders 50000

Earnings per share

(Earnings for eq sh holders/no of eq sh holders)

2.112 per share
Dividend payout ratio

100%

So dividend per share= 2.112 (EPS*100%)

Cost of equity = 12%

So the Vlaue of equity share= Dividend per share/cost of equity

Value of share= 2.112/.12= $17.60

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