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Company Analysis: Dan no longer works for Alphabet, but he has a relatively large amount of his personal wealth tied up in both company stock

Company Analysis:

Dan no longer works for Alphabet, but he has a relatively large amount of his personal wealth tied up in both company stock and debt. Consequently, he would like an objective review of the company today and its future prospects. He would also like an opinion on the stocks equity and bond valuations. Dan has sufficient alternative assets and doesnt need to sell his ABCD stock or bonds, but he is becoming concerned about increasing inflation and is reviewing all of his holdings.

Economic Environment:

The risk-free rate is at 4.2%. The economy is just coming out of a recession, but Alphabet is in an early cycle industry and is already recovering (after a downturn in 2007). Alphabets earnings are expected to grow 12%. Inflation is running at 3%, but both Dan and economists are concerned that inflation could rise to 6% within five years.

Alphabet Corp - Income Statement

Period Ending

2010

2009

2008

Total Revenue

45,000,000

37,500,000

34,000,000

Cost of Revenue

22,000,000

18,750,000

18,700,000

Gross Profit

23,000,000

18,750,000

15,300,000

Operating Expenses

Research Development

1,800,000

800,000

750,000

Selling General and Administrative

7,800,000

6,750,000

6,300,000

Total Operating Expenses

9,600,000

7,550,000

7,050,000

EBIT

13,400,000

11,200,000

8,250,000

Interest Expense

950,000

1,350,000

1,400,000

EBT

12,450,000

9,850,000

6,850,000

Income Tax Expense

3,975,000

2,950,000

2,050,000

Net Income Applicable To Common Shares (EAT)

$8,475,000

$6,900,000

$4,800,000

Dividend per share

$.385

$.31

$.20

Alphabet Corp Balance Sheet

Period Ending

2010

2009

2008

Assets

Current Assets

Cash And Cash Equivalents

2,500,000

3,200,000

2,200,000

Net Receivables

9,000,000

5,500,000

3,400,000

Inventory

5,500,000

5,000,000

4,000,000

Total Current Assets

17,000,000

13,700,000

9,600,000

Long Term Investments

3,000,000

4,000,000

4,000,000

Property Plant and Equipment

7,750,000

8,500,000

8,500,000

Goodwill

1,250,000

1,350,000

1,400,000

Total Assets

29,000,000

27,550,000

23,500,000

Current Liabilities

Accounts Payable

4,500,000

3,800,000

3,500,000

Other Current Liabilities

900,000

750,000

800,000

LT Debt Due

-

3,000,000

-

Total Current Liabilities

5,400,000

7,550,000

4,300,000

Long Term Debt

8,000,000

8,000,000

11,000,000

Total Liabilities

13,400,000

15,550,000

15,300,000

Stockholders' Equity

Preferred Stock

-

-

-

Common Stock (11 MM shares @ 1.00)

11,000,000

11,000,000

11,000,000

Retained Earnings

4,600,000

1,000,000

-2,800,000

Total Stockholder Equity

15,600,000

12,000,000

8,200,000

LT Debt 3 MM at 11% maturing 2015, 5 MM at 8% maturing 2020.

QUESTION 6

Which of the following contributed to Alphabets high ROE in 2010?

(1) Increased Financial leverage

(2) Increased turnover

(3) Increased sales margin

(4) Decreased tax rate

1 and 2

2 and 3

All of the answer choices.

1, 2 and 3

QUESTION 7

Which of the following would not be found in the financial statement footnotes?

(1) Alphabet had sold and leased back its production facility

(2) The company had changed its recognition of revenue to delivery date rather than when items are sold.

(3) Depreciation expenses fell when Alphabet changed its depreciation method

(4) $200 MM in long term debt is due to mature in Nov. of 2012.

2 and 4

4 only

They would all be included in the footnotes

3 and 4

QUESTION 8

What has been Alphabets approximate dividend payout ratio over the past two years?

60%

50%

40%

45%

QUESTION 9

What has been Alphabets Earnings Per Share over the past two years?

$7.71, $6.27

$1.30, $0.80

$1.22, $1.02

$.77, $.63

QUESTION 10

Through increased sales and new opportunities, Alphabet expects its earnings to continue to grow at a 20% annual rate over the next 7 years. To maximize shareholder wealth, what should be Alphabets dividend policy?

Grow dividends at the same 20% rate

Decrease its payout ratio

Increase the payout ratio

No change in the payout ratio

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