The Baron Basketball Company (BBC) earned $10 a share last year and paid a dividend of $6
a share. Next year, you expect BBC to earn $11 and continue its payout ratio. Assume that assume that you expect to sell the stock for $132 a year from now. If you require 12 percent on this stock, how much would you be willing to pay for it?
Given the expected earnings and dividend payments in Problem 4, if you expect a selling price of $110 and require an 8 percent return on this investment, how much would you pay for the BBC stock?
(Question 4 is composed of two parts.) The DuPont Formula defines the nedt return on shareholders’Equity as a function of the following components:
Operating Margin A
Income Tax Rate
Using only the data in the table below:
a. Calculate each of the five components listed above for 2010 and 2014, and calculate the return on equity (ROE) for 2010 and 2014, using all of the five components. Show calculations.
b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2010 to 2014.
Income State Data 2010 2014
Revenues $542 $979
Operating Income $38 $76
Depreciation and Amortization $3 $9
Interest Expense $3 $9
Pretax Income $32 $67
Income Taxes $13 $37
Net Income After Tax $19 $30
Balance Sheet Data 2010 2014
Fixed Assets $41 $70
Total Assets $245 $291
Workign Capital $123 $157
Total Debt $16 $-
Total Shareholders’ Equity $159 $220