Rio National Corp. is a U.S.-based company and the largest competitor in its industry.

Tables 13.5–13.8 present financial statements and related information for the company.

Table 13.9 presents relevant industry and market data.

The portfolio manager of a large mutual fund comments to one of the fund’s analysts, Katrina Shaar: “We have been considering the purchase of Rio National Corp. equity shares, so I would like you to analyze the value of the company. To begin, based on 2009 2008 Cash $ 13.00 $ 5.87 Accounts receivable 30.00 27.00 Inventory 209.06 189.06 Current assets $252.06 $221.93 Gross fixed assets 474.47 409.47 Accumulated depreciation (154.17) (90.00)

Net fixed assets 320.30 319.47 Total assets $572.36 $541.40 Accounts payable $ 25.05 $ 26.05 Notes payable 0.00 0.00 Current portion of long-term debt 0.00 0.00 Current liabilities $ 25.05 $ 26.05 Long-term debt 240.00 245.00 Total liabilities $265.05 $271.05 Common stock 160.00 150.00 Retained earnings 147.31 120.35 Total shareholders’ equity $307.31 $270.35 Total liabilities and shareholders’ equity $572.36 $541.40 TA B L E 1 3 . 5 Rio National Corp.

Summary year-end balance sheets

(U.S. $ millions)

www.mhhe.com/bkm 430 Part FOUR Security Analysis Note 1: Rio National had $75 million in capital expenditures during the year.

Note 2: A piece of equipment that was originally purchased for

$10 million was sold for $7 million at year-end, when it had a net book value of $3 million. Equipment sales are unusual for Rio National.

Note 3: The decrease in long-term debt represents an unscheduled principal repayment; there was no new borrowing during the year.

Note 4: On 1 January 2009, the company received cash from issuing 400,000 shares of common equity at a price of $25.00 per share.

Note 5: A new appraisal during the year increased the estimated market value of land held for investment by $2 million, which was not recognized in 2009 income.

TA B L E 1 3 . 7 Rio National Corp.

Supplemental notes for 2009 Revenue $300.80 Total operating expenses (173.74)

Operating profit 127.06 Gain on sale 4.00 Earnings before interest, taxes, depreciation

& amortization (EBITDA) 131.06 Depreciation and amortization (71.17)

Earnings before interest & taxes (EBIT) 59.89 Interest (16.80)

Income tax expense (12.93)

Net income $ 30.16 TA B L E 1 3 . 6 Rio National Corp.

Summary income statement for the year ended December 31, 2009 (U.S. $ millions)

Note: The dividend payout ratio is expected to be constant.

Dividends paid (U.S. $ millions) $3.20 Weighted average shares outstanding during 2009 16,000,000 Dividend per share $0.20 Earnings per share $1.89 Beta 1.80 TA B L E 1 3 . 8 Rio National Corp.

Common equity data for 2009 Risk-free rate of return 4.00%

Expected rate of return on market index 9.00%

Median industry price/earnings (P/E) ratio 19.90 Expected industry earnings growth rate 12.00%

TA B L E 1 3 . 9 Industry and market data December 31, 2009 Rio National’s past performance, you can assume that the company will grow at the same rate as the industry.”

a. Calculate the value of a share of Rio National equity on December 31, 2009, using the constant growth model and the capital asset pricing model.

b. Calculate the sustainable growth rate of Rio National on December 31, 2009. Use 2009 beginning-of-year balance sheet values.

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