Assignment 4 - Stock Valuation Robert Campbell and Carol Moms are senior vice-presidents of the Mutual of Chicago Insurance Company They are co-directors of the company's pension fund management division. A major new client has requested that Mutual of Chicago present an investment seminar to illustrate the stock valuation process. As a result, Campbell and Morris have asked you to analyze the Bon Temps Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions. k. Assume that Bon Temps' earings and dividends are expected to decline by a constant 6% per year- that is, 9 = 26%. Why might someone be willing to buy such a stock, and at what price should it sell? What would be the dividend yield and capital gains yield in each year? I. Bon Temps' financial statements show the following information Average cost of funds 10.0 % EBIT $ 500,000 Total capital $1,250,000 EPS $2.00 Shares outstanding 150,000 Marginal tax rate 30.0% (1) Compute the company's economic value added (EVA) (2) Interpret the value you computed in part 1(1). m. Suppose that normally Bon Temps' P/E ratio is 20x. Using the information given in part (1), estimate the market price per share for Bon Temps' common stock Assignment 4 - Stock Valuation Robert Campbell and Carol Moms are senior vice-presidents of the Mutual of Chicago Insurance Company They are co-directors of the company's pension fund management division. A major new client has requested that Mutual of Chicago present an investment seminar to illustrate the stock valuation process. As a result, Campbell and Morris have asked you to analyze the Bon Temps Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions. k. Assume that Bon Temps' earings and dividends are expected to decline by a constant 6% per year- that is, 9 = 26%. Why might someone be willing to buy such a stock, and at what price should it sell? What would be the dividend yield and capital gains yield in each year? I. Bon Temps' financial statements show the following information Average cost of funds 10.0 % EBIT $ 500,000 Total capital $1,250,000 EPS $2.00 Shares outstanding 150,000 Marginal tax rate 30.0% (1) Compute the company's economic value added (EVA) (2) Interpret the value you computed in part 1(1). m. Suppose that normally Bon Temps' P/E ratio is 20x. Using the information given in part (1), estimate the market price per share for Bon Temps' common stock
