FIN 300 Chapter Notes - Chapter 8: Price–Earnings Ratio, Cash Flow, 0 (Year)

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30 Jan 2013

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A share of stock is a unit of ownership in a company. Shares and stocks are used interchangeably, also equities and securities. Stockholders, shareholders, owners and stock investors are terms to describe the person who earns the shares. Labeled common stock on liabilities/owners equity on a b/s. One restriction, they cannot use the company"s buildings or assets, only when there is liquidation during bankruptcy and after the bond holders are paid off. The price of the stock divided by the earning per share (eps). Key tool of stock market analysis to determine how well" a company is doing. Cash can be received in two ways as a stockholder. Dividends cash payments taken from net income generated by the firm. sell your shares and make a capital gain/loss. You sell that either to an investor or back to the company. The price of the stock is the pv of these expected cash flows, as with bonds.

Related Questions

Stock repurchase The following financial data on the Bond Recording Company are

available:

Earnings available for common stockholders $800,000

Number of shares of common stock outstanding 400,000

Earnings per share ($800,000, 400,000) $2

Market price per share $20

Price/earnings (P/E) ratio ($20, $2) 10

The firm is currently considering whether it should use $400,000 of its earnings to

pay cash dividends of $1 per share or to repurchase stock at $21 per share.

a. Approximately how many shares of stock can the firm repurchase at the $21-pershare

price, using the funds that would have gone to pay the cash dividend?

b. Calculate the EPS after the repurchase. Explain your calculations.

c. If the stock still sells at 10 times earnings, what will the market price be after the

repurchase?

d. Compare the pre- and postrepurchase earnings per share.

e. Compare and contrast the stockholdersâ positions under the dividend and repurchase

alternatives. What are the tax implications under each alternative?

The following financial data on the Bond Recording Company areâ available:

The firm is currently considering whether it should use â$400,000 of its earnings to help pay cash dividends of â$1.00 per share or to repurchase stock at â$29 per share.

a. Approximately how many shares of stock can the firm repurchase at the â$29-per-share price, using the funds that would have gone to pay the cashâ dividend?

b.ââCalculate the EPS after the repurchase.

c. If the stock still sells at 14 timesâ earnings, what will the market price be after theâ repurchase?

d. Compare theâ pre- andâ post-repurchase earnings per share.

e.ââCompare and contrast theâ stockholders' positions under the dividend and repurchase alternatives. What are the tax implications under eachâ alternative?

Earnings available for common stockholders	$800,000
Number of shares of common stock outstanding	400000
Earnings per share ($800,000/400,000)	$2
Market price per share	$28
Price/earnings (P/E) ratio ($28/$2)	14

amaranthsheep371

Just need the last two questions answered A and B at the bottom of the document

Youâre the chief financial officer (CFO) of Worldwide
Widget Manufacturing, Inc. The company manufactures and
sells widgets at factories in the United States and internationally.
Listed below are partial financial statements for Worldwide
Widget Manufacturing, Inc. Fill in the missing information in
each of the following financial statements. Answer spaces are
given below.

Worldwide Widget Manufacturing, Inc.
Balance Sheet as of December 31, 2015 and 2014
(in millions of dollars)

	2015	2016		2015	2016
Assets Current Assets:			Liabilities and Equity Current Liabilities:
Cash and markatable securities	$427	$322	Accured wages and taxes	$309	$257
Accounts Receivable	a.?	259	Accounts payable	381	b.?
Inventory	815	797	Notes Payable	$492	$421
Total	$1,542	$1,378	Total	$1,182	$997
Fixed Assets:			Long-term debt:	$1,934	c.?
Gross plant and equipment	d.?	$2,817	Total	3,116	2,956
Less:depreciation	368	254	Stockholder's equity:
Net plant and equipment	$2,872	$2,563	Preferred stock ( 30 million shares)	$30	$30
Other long term assets	521	487	Common stock and paid in surplus (250 million shares)	300	e.?
			Retained earnings	1,489	1,142
Total FA	f.?	$3,050	Total Equity	$1,819	$1,472
Total Assets	$4,935	$4,428	Total liabilities and equity	$4,935	$4,428

A. Accounts receivable for 2015_______300

B. Accounts payable for 2014_______319

C. Gross plant and equipment for 2015_______1959

D. Long-term debt for 2014_______3240

E. Common stock and paid-in surplus (250 million shares) for 2014_______300

F. Total FA for 2015_______3393

Worldwide Widget Manufacturing, Inc. Income Statement for Years Ending December 31, 2015 and 2014(in millions of dollars)

	2015	2014
Net Sales	g.	$2018
Less: Cost of Goods Sold	753	h.?
Gross Profits	$1,623	$1,189
Less: Other Operating Expense	423	167
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	$1,200	$1,022
Less: Depreciation	114	114
Earning before interest and taxes (EBIT)	$1,086	$908
Less: Interest	i.?	128
Earnings:before Taxes (EBT)	$949	$780
Less:Taxes	j.?	23
Net Income	$664	$546
Less:Preferred stock dividends	98	98
Net income available to common stock holders	$566	$448
Less:Common stock dividends	219	199
Addition to retained earnings Per common share data:	$347	$249
Earnings per share (EPS)	k.?	$1.79
Dividends per share (DPS)	$0.88	l. ?
Book Value per share (BVPS)	m.?	$5.77
Market Value per share (MVPS)	$23.97	$22.47

g. Net sales for 2015_______2376
h. Less: Cost of goods sold for 2014_______829
i. Less: Interest for 2015_______137
j. Less: Taxes for 2015_______285
k. Earnings per share (EPS) for 2015_______1.88
l. Dividends per share (DPS) for 2014_______.73
m. Book value per share (BVPS) for 2015_______7.16

Worldwide Widget Manufacturing, Inc.
Statement of Cash Flows for Year Ending December 31, 2015
(in millions of dollars)â

Section A: Cash Flows from operating activities
Net Income	n.?
Additions (source of cash): Depreciation	114
Increase in accrued wages and taxes	o.?
Increase in accounts payable	62
Subtractions (use of cash): Increase in accounts receivable	-41
Increase in inventory	p.?
Net Cash flow from operating activities	q.?
Section B: Cash Flows from investing activities subtractions: Increase in fixed assets	-$343
Increase in other long-term assests	r.?
Net Cash flow from investing activities	s.?
Section C. Cash flows from financing activities Additions: Increase in notes payable	t.?
Increase in common and preferred stock	0
Subtractions: Decrease in long-term debt	-25
Pay dividends	u.?
Net Cash flow from financing activities Section D. Net Change in cash and marketable securities	v.? $105

n. Net income_______664
o. Increase in accrued wages and taxes_______52
p. Increase in inventory_______18
q. Net cash flow from operating activities_______833
r. Increase in other long-term assets_______34
s. Net cash flow from investing activities_______-377
t. Increase in notes payable_______71
u. Pay dividends_______317
v. Net cash flow from financing activities_______-271

Worldwide Widget Manufacturing, Inc.
Statement of Retained Earnings as of December 31, 2015
(in millions of dollars)

Balance of retained earnings, December 31,2014		$1,142
Plus: Net income for 2015		w.?
Less: Cash dividends paid	0	0
Preferred stock	x.?
Common Stock	219
Total cash dividends paid		317
Balance of retained earnings, December 31,2015		$1,489

w. Plus: Net income for 2015 _______664
x. Preferred stock _______98

2. Youâll need to compare your companyâs ratios with the industryâs standards.

Worldwide Widget Manufacturing, Inc.

	Company	Industy	Comparison
Current Ratio		2.2 times
Quick Ratio		1.1 times
Cash Ratio		0.35 times
Inventory turnover		2 times or 1 time
Days' sales in inventory		135 days or 335 days
Average payment period		110 days
Sales to working capital		3 times
Total asset turnover		0.6 times
Debt-to equity		1.1 times
Profit margin		16.5%
Gross profit margin		48.13%
ROA		8.78%
ROE		19.45%
Divident payout		32%

A. Use the information found in Worldwide Widget Manufacturingâs financial statements
to calculate all of the listed financial ratios in the above table for your
company. Then, for each ratio, provide a comparison of the companyâs result
with the industry standards, indicating if your companyâs results are lower than,
higher than, slower than, or faster than the industry standards.
B. Calculate your companyâs internal and sustainable growth rates.

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FIN 300 Chapter Notes - Chapter 8: Price–Earnings Ratio, Cash Flow, 0 (Year)

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