Question

1. You have been given the following projections for Ted Muzinga Corporation for the coming year,

• Sales                                                                = 20,000 units
• Sales prices per units                                       = $10
• Variable cost per unit                                      = $5.5
• Fixed Costs                                                     = $10,000
• Bonds outstanding                                          = $10,000
• Interest Rate on outstanding bonds                 = 7.7%
• Tax rate                                                           = 40%
• Share of common stock outstanding               = 20,000 shares
• Beta                                                                 = 1.25
• Risk Free Rate                                                 = 5%
• Market Return                                                 = 10%
• Dividend payout ratio                                      = 70%
• Growth rate                                                     = 4%

Calculate the current price per share for Dennis George Corporation.

Answer 1

Sales = 20,000 units * $10 = $200,000

Variable Cost = 20,000 * $5.5 = $110,000

Contribution = $90,000

Fixed Cost = $10,000

Gross Profit = $80,000

Interest paid = 7.7% * $10,000 = $770

Net Profit = $79,230

EPS = $79,230 / 20,000 = $3.96

Div = $3.96 * 70% = $2.77

As per CAPM:

Ke = Risk free rate + beta * (Market return - Risk free rate) = 5% + 1.25 * (10% - 5%) = 6.56%

As per Gordon's Model:

Share Price = Div / (Ke - growth rate) = $2.77 / (6.56% - 4%) = $43.98