Problem 12-33

OceanGate sells external hard drives for $400 each. Its total fixed costs are $60 million, and its variable costs per unit are $240. The corporate tax rate is 30%. If the economy is strong, the firm will sell 4 million drives, but if there is a recession, it will sell only half as many.

a. What is the firm's degree of operating leverage (defined as the ratio of the percent change in EBIT to the percent change in sales) in going from a recession to a strong economy?

Degree of operating leverage

b. If the economy enters a recession, what will be the firms after-tax profit? (Enter your answer in millions.)

After-tax profit $ million

Problem 13-20

The market consensus is that Analog Electronic Corporation has an ROE = 9% and a beta of 1.95. It plans to maintain indefinitely its traditional plowback ratio of 3/5. This year's earnings were $2.6 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return.

a. Find the price at which Analog stock should sell. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price $

b. Calculate the P/E ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	P/E ratio
Leading
Trailing

c. Calculate the present value of growth opportunities. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

PVGO $

d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 2/5. Find the intrinsic value of the stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Intrinsic value of the stock $

Problem 13-23

The risk-free rate of return is 7.0%, the expected rate of return on the market portfolio is 20%, and the stock of Xyrong Corporation has a beta coefficient of 1.8. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $20 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 25% per year on all reinvested earnings forever.

a. What is the intrinsic value of a share of Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Intrinsic value $

b-1. If the market price of a share is currently $58, and you expect the market price to be equal to the intrinsic value one year from now, calculate the price of the share after one year from now. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price $

b-2. What is your expected one-year holding-period return on Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected one-year holding-period return %