Assume today is 1/1/2011. The current liabilities consist primarily of notes payable to banks which represents permanent financing. The interest rate (prime rate) on this debt is 6.50% percent, the same as the rate on new bank loans. The long-term debt consists of 20,000 bonds, each of which has a par value of $1,000, carries an annual coupon of $98, and matures in 10 years. The current rate of interest on new long-term debt is 8.05%, and this is the present yield to maturity on the bonds. (This can be compared to the current U.S. Treasury long-bond, which carries a 4.75 % rate of interest.) Preferred stock consists of 30,000 9% shares. Current market price is 107.5% of par. Based on continued robust growth in the market for mountain bikes, Gerard expects that Bobs 2011 Net Profits available to Common Shareholders (after Preferred) will fall somewhere in the distribution shown below.

Earnings have grown at 15.5% p.a. and investors expect past trends to continue. The firms common stock currently sells for $40 per share (creating a market capitalization of $60 million), and the expected dividend for 2011 is 50% of EPS for the year. Overall, investors have enjoyed a 13.8% return in the U.S. stock market in recent years, and this too is expected to continue. ValueLink assigns a Beta of 1.35 to Bobs Bike Shop while Bloomberg calculated a Beta of 1.25. Bobs marginal state-plus-federal tax rate is 35%.

What is the expected value of Bobs Bike 2011 Earnings, EPS, and DPS? Calculate Bobs Cost of Equity using DCF.

2010 Book Value Summary Balance Sheet Current Assets $45,000,000 Fixed Assets 40,000,000 Current Liabilities Long-term Debt Preferred Stock (at par) Common Stock Retained Earnings Total Claims $27,000,000 20,000,000 3,000,000 1,500,000 33,500,000 $85,000,000 Total Assets $85,000,000 Probability 0.10 0.15 0.40 0.25 0.10 NPAT $700,000 $900,000 $2,350,000 $2,900,000 $3,950,000