--%>
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 : Problem on rules of the International

    RainFlower Trading Limited is a wholesaler of electronic calculators in Hong Kong. It has been importing goods from a Philippine manufacturer for eight years. The Philippine manufacturer had accepted payments in advance in the past. Recently, because of political turm

    		•
  • Q : Explain few Spanish mutual funds

    Is this true that very little Spanish mutual funds outperform their benchmark? Isn’t this strange?

    		•
  • Q : What are Workpapers Workpapers : In

    Workpapers: In finance world, work papers are documents which are created during the procedure of computing the financial records of a business or individual. The accounting professional which is tasked with examining the book-keeping of a business mi

    		•
  • Q : Selling or purchasing problem Atlas

    Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures

    		•
  • Q : What is Regular meeting of day-to-day

    Regular meeting of day-to-day commitments: The estimation of WCR also helps to ensure that there is positive WC existence. This proves helpful in meeting requirements which are regular in nature such as payments of salaries, wages, rental charges etc.

    		•
  • Q : Long-Term Financing Needed Long-Term

    Long-Term Financing Needed : - At year-end 2012, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were $2.5 million, are expected to increase by 25% in 2013. Total ass

    		•
  • Q : Explain accurately value bond options

    If the model could not even find bond prices right, how could this hope to accurately value bond options?

    		•
  • Q : Define Strong form market efficiency

    Strong form market efficiency: Strong form market efficiency defines that the price of a security in the market replicates all information—public and also private or within information. Strong form efficiency

    		•
  • Q : When the dividend shows real money The

    The dividend is the part of the net income which the company distributes to shareholders. When the dividend shows real money, the net income is also real money. Is it true?

    		•
  • Q : Earnings management What do you mean by

    What do you mean by Earnings management and what are their actions and activities?

    		•