Assume that Saxton's Net Income is a Perpetuity. Then using the firm's Return On Equity as its Required Rate of Return, determine the value of the Saxton Company based upon its Net Income.

Return On Equity (ROE) (%) = Net Income / Total Owners Equity-$200,000/ ($1,600,000-$600,000) =20%-

Income Statement

For the Year Ended December 31, 2009

Sales (all on credit) $ 4,000,000

Cost of Goods Sold3,000,000

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Gross Profit.$ 1,000,000

Selling and Administrative Expenses. 450,000

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Operating Profit $ 550,000

Interest Expense 50,000

Extraordinary Loss. 200,000

Earnings Before Taxes$ 300,000

Income Taxes (33%). 100,000

Net Income.$ 200,000

SAXTON COMPANY

Balance Sheet

As of December 31, 2009

Assets

Cash $ 30,000

Accounts Receivable.. 350,000

Marketable Securities .. 50,000

Inventory. 370,000

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Total Current Assets. $ 800,000

Net Plant and Equipment.. 800,000

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Total Assets.$ 1,600,000

Liabilities and Stockholders Equity

Accounts Payable..$ 50,000

Notes Payable.. 250,000

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Total Current Liabilities..$ 300,000

Long Term Liabilities 300,000

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Total Liabilities ..$ 600,000

Common Stock. 400,000

Retained Earnings.. 600,000

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Total Stockholders Equity.$ 1,000,000

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