--%>
Assignment Help - homework help

Price per share for Corporation

For XYZ Corporation debt-to-equity ratio, marginal tax rate, and dividend payout ratio are all of 40%. The cost of debt is 10%. Cambria contains 1 million shares of common stock, and $25 million in long-term bonds. Its dividend is $1 per share. Determine the EBIT and the price per share for XYZ.

E

Expert

Verified

Debt-to-equity ratio = 40%
D = $25 million
E = $25/0.4 = $62.5 million

XYZ has 1 million shares of common stock and its current market value is $62.5 million. Hence the price per share is $62.5.

Dividend payout ratio = DPS/EPS = 0.4
1/EPS = 0.4
EPS = $2.5

Earnings available to common shareholders = $2.5*1 million shares = $2.5 million
Profit before tax = $2.5 million/(1 – marginal tax rate) = $2.5 million/(1 – 0.4)
Profit before tax = $2.5 million/0.6 = $4.167 million
Interest expense = $25 million*10% = $2.5 million
EBIT = profit before tax + interest expense = $4.167 + $2.5 = $6.667 million

Thus EBIT is $6.667 million and price per share for XYZ is $62.50

   Related Questions in Corporate Finance

  • Q : Explain undervaluation of share on the

    Suppose we calculate g as ROE (1–p)/(1–ROE (1–p)) and the Ke by the CAPM. We replace both values into the formula PER = (ROE (1+g) – g)/ROE (Ke-g) but there PER we obtain is fully different from the one we get by dividing the quotation of the s

    		•
  • Q : Calculating Beta when market

    A company with a market capitalization of $100 million has no debt and a beta of 0.8. What will its beta be after it borrows $50 million (giving that there are no other changes and no taxes)?

    		•
  • Q : Financial engineering financial

    financial engineering examples,benifits,disadvantages

    		•
  • Q : How companies accuse investors make

    Sometimes, companies accuse investors of performing credit sales which they make their quotations fall. Is it true?

    		•
  • Q : Which method must use to valuate young

    Which method must we use to valuate young companies along with high growth but uncertain futures? Two illustrations were Boston Chicken and Telepizza while they began.

    		•
  • Q : Problem on financial manager

    Assume that you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production plant in China, so it needs to take a loan of US$1 million. Bank A offers Yuen Cheong

    		•
  • Q : Shall we use the arithmetic mean or the

    The market risk premium is the difference between the historical return on the stock market and the return on bonds. But how many years does “historical” imply? Shall we use the arithmetic mean or the geometric one?

    		•
  • Q : Explain investment of bank for

    When my company is not listed, therefore the investment banks apply an illiquidity premium. In fact, they say this is an illiquidity premium but then they call this a small cap premium. Only one of the banks, apparently based upon Tit

    		•
  • Q : Define the term Stock Market crash

    Stock Market Crash was responsible for the Great Depression. Middle class families lost all their savings as they had gambled the market on margin.Those banks which were under the loan ofbrokers’ started removing money out of the savings account

    		•
  • Q : Public Finance which type of tax,

    which type of tax, direct or indirect is applicable in underdeveloped countries? Why? Show your critical areas and weaknesses.

    		•