8) The common stock of Seabreeze Inc. has historically traded at between 18-20 times earnings. The company just initiated a cash dividend equal 10% of net earnings. What do you expect will happen to the PE ratio?

9) Sharmon Inc. has 1 million shares of common stock outstanding at 12/31/15. Book value per share is $4.00 and the closing market price was $16.00 per share. The company has total liabilities of $8 million, including $3 million of debt and total cash and marketable securities of $500,000.

a) Calculate total assets

b) Calculate enterprise value

10) Recurring NICO = $1.25 per share, ROE was 15% and the company paid a dividend of $0.25. Calculate the sustainable growth rate.

11) Recurring NICO = $2.50 per share. You expect earnings to grow by between 10% to 14% per year for the foreseeable future. Calculate estimated earnings per share for future years 1 and 2.

12) Using your answers to question 11, assuming that the PE ratio really does gravitate towards the growth rate, forecast the stock price for future years 1 and 2.

13) Using the year 2 stock price range identified in question 12, calculate the range of expected return on investment if the stock is currently priced at:

a) $25.00 per share (10 times EPS)

b) $30.00 per share (12 times EPS)

c) $35.00 per share (14 times EPS)

14) A privately held company generates EBITDA of $1.2 million per year. Businesses of this type normally sell for between 4-6 times EBITDA. The Company currently has book value of $1 million and debt of $3 million. The minimal amount of cash held by the business is needed for working capital.

a) Calculate the enterprise value range for the company.

b) Calculate the market value of equity range for the company.

c) Assume that we bought the business for $6 million (5 times EBITDA) by borrowing $5 million and putting in equity of $1 million. Our management team managed to increase EBITDA to $2.0 million by year 3 and by the end of year 3 we had paid down $2.5 million of the debt. Assuming that at the end of year 3 we sell the business at 5 times EBITDA. Calculate the MVE and our return (CAGR) on our $1 million investment.

d) If, because EBITDA is now growing, we can get 6 times EBITDA for the business recalculate MVE at the end of year 3 and our return (CAGR) on our $1 million investment. (Welcome to the wonderful world of private equity).