Question
Ms. Janet McInish is currently considering selling her stock ownership. She strongly believes that the share is overpriced and is going to experience a price
Ms. Janet McInish is currently considering selling her stock ownership. She strongly believes that the share is overpriced and is going to experience a price drop soon. In order to better understand the current situation of Golden Cup stock, she was advised to use the price earnings ratio. Giving that the total market value of Ms. Janet Golden Cups shares is $120,000.
a- If Ms. Janet believes that any stock that has a P/E ratio that is more than 20% of the industry average to be overpriced, do you recommend Ms. Janet to sell her shares knowing that industry average P/E ratio is 10? Show your calculations as well as your recommendation.
b- What is Ms. McInish total tax liability if her tax status is (married filing together? (hint, you can find the personal income tax rates on the following web page:
https://taxfoundation.org/2019-tax-brackets/)
In addition to that, you know the following facts about firms operations throughout the year:
- Golden Cup revenues for the year includes the following: Domestic revenues $160,000. International revenues $80,000. Out of Golden Cups sales, cost of sales and direct labor is 50% of annual revenues.
- Because of the strong competition that it faces, Golden Cup has a generous marketing plan. Golden Cup signed a contract with the marketing planet Inc. by which the marketing agency will be responsible for Golden Cup marketing for five years period started this year. The contract costs Golden Cup $100,000 that were paid up front, however the company thinks this plan will affect its sales evenly over the five years period. Golden Cup also spends $30,000 in the form of general and administrative expenses per year. Golden Cup depreciable assets historical value is $40,000 and is depreciated on a straight line basis over 10 years.
- Golden Cup pays interest rate of 10% on its Long-term debt outstanding.
- Out of the years net income, Golden Cup is planning to repay $30,000 to its shareholders in the form of cash dividends. The company currently has 60,000 shares outstanding
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