Maggie Smith just graduated from College and is starting a job as a junior financial analyst for Seahawk Investments. She has studied fundamental analysis in College and is eager to impress her colleagues. Ms. Smith is convinced that an in depth understanding of the forward P/E ratio is one of the most useful tools for investment decisions. She plans to use the forward P/E ratio to help her firm identify undervalued stocks. Ms. Smith is currently reviewing information on a company called Food For Life, incorporated (FFL). The company distributes healthy food across the United States. FFL has been in business for twenty years and is located in Wilmington, NC. Ms. Smith has spent many hours analyzing the company. She believes that Americans will continue to eat more healthy food and FFL may be an attractive investment. Ms. Smith is concerned about FFLs new management team. In a recent news conference, the new Chief Financial Officer (CFO) of FFL stated that FFL should have increased their dividend payout ratio to 60% last year. The CFO stated that a higher dividend payout ratio would have increased the stock price. Ms. Smith is evaluating the validity of the CFOs statement. Ms. Smith expects that FFLs Return on Equity (ROE) and required return would have remained the same if the company changed their dividend payout ratio to 60%. She is uncertain about the impact on the price of the stock. (Round all earnings, dividends and prices to the nearest penny and round all other figures to four decimal places) a. Use the DuPont identity to calculate FFLs ROE in 2015. (4 minutes) b. Calculate FFLs Dividend payout ratio and sustainable growth rate in 2015? (4 minutes) c. Calculate the required return for FFL using the Capital Asset Pricing model. (4 minutes) d. Calculate the forward P/E ratio in 2015 and the stock price today under two scenarios. The first scenario is based on FFLs actual dividend payout ratio in 2015. The second scenario is based on the assumption that the new CFO changed the dividend payout ratio to 60% in 2015. (12 minutes) e. Should FFL have changed the dividend payout ratio to 60% in 2015? Explain the reasons why increasing the dividend payout ratio would have been a good or bad idea for FFL. What is the critical question that the CFO should consider when making this decision? (6 minutes)

Current Assets 2015 Cash $20,000 Accounts Receivable $60,000 Inventory $80,000 Current Assets $160,000 Other Assets Property, plant and equipment $375,000 Accumulated depreciation -$75,000 Net property, plant and equipment $300,000 Intangible assets $75,000 Other noncurrent assets $30,000 Total noncurrent assets $565,000 Total Assets $725,000 Current Liabilities Short-term notes payable $25,000 Accounts payable $35,000 Total current liabilities $60,000 Long-term liabilities Long-term liabilities $225,000 Other noncurrent liabilities $35,000 Total liabilities $320,000 Shareholder equity Common equity $50,000 Retained earnings $355,000 Total equity $405,000 Total equity and liabilities $725,000

Table 2

Sales $675,000 Cost of Good Sold $425,000 Gross profit $250,000 Selling, general and administrative expenses $170,000 Earnings, before interest, taxes depreciation and amortization (EBITDA) $80,000 Depreciation and amortization $15,000 Earnings before interest, and taxes (EBIT) $65,000 Interest $16,000 Earnings before taxes $49,000 Income taxes $12,250 Net income $36,750 Additional information Number of shares outstanding (000) 20000 Dividend distributed (000) $15,000 Return on 30 year Treasury securities 2.75% Expected return on a market index 9.50% Standard deviation of FFP's returns 15.00% Beta for FFP 0.8 Expected inflation 2.00% Income Statement for FFL, Inc. From January 1, 2015 - December 31, 2015 All figures are in thousands of dollars (except for per share data)