National Industries Ltd. is a Canadian venture corporation that holds investments in several industries. The company owns shares in a number of active business corporations in both Canada and the United States. Its income consists of dividends and management fees from the subsidiaries.
Charles Prokopchuk is a vice-president of National and is responsible for acquiring companies in the transportation industry. Currently, National owns three subsidiary corporations in this industry. Prokopchuk monitors their progress and provides head office management services.
Three months ago, Prokopchuk sought a buyer for and negotiated the sale of Tri-Lon Transport Ltd. The shares of Tri-Lon were sold for $14,000,000. He is extremely pleased with the sale because he was instrumental in acquiring the shares of Tri-Lon seven years earlier for a price of $2,000,000. At that time, Tri-Lon was in its early growth stages; Prokopchuk is happy that he recognized the company’s potential so early on. After acquiring Tri-Lon, Prokopchuk had hired new managers, streamlined the operations, and focused expansion in the areas where the company was strong. Profits grew rapidly, so that by the time the shares were sold, Tri-Lon had retained earnings of $8,000,000.
The president of National Industries congratulates Prokopchuk for a job well done and indicates that the cash generated from the sale of Tri-Lon shares was vital, as the company is facing the termination date of one of its major bond issues. However, even after receiving the additional cash from the Tri-Lon sale, National will still have to restructure its debt and obtain new long-term financing. The president has indicated that it is critical for the company to get a high rating on its bonds in order to secure the lowest possible interest costs. He informs Prokopchuk:
“Your success with Tri-Lon will make a big impact on our bottom line and earnings per share for the current year. Stock prices should improve and our proposed new bond issue will be better accepted in the market. You have carried out your responsibilities perfectly.”
Historically, the shares of National Industries have traded on the Toronto Stock Exchange at a price equivalent to 12 times after-tax earnings. The company has 8,000,000 shares outstanding, and the president is certain that the share price will be $60 after the current year’s earnings have been released.
Required:
Do you agree with the president’s assessment of Prokopchuk’s success? Explain.