Question 1.

Arthur Rhodalyn Shipping Ltd. expects to earn $1 million per year in perpetuity if it undertakes no new investment opportunities. There are 100,000 shares outstanding, so EPS is $10 (or $1,000,000/100,000). The firm will have an opportunity at date 1 to spend $1,000,000 on a new marketing campaign. The new campaign will increase earnings in every subsequent period by $210,000 (or $2.10 per share). This is a 21 percent return per year on the project. The firms discount rate is 10 percent. What is the value per share before and after deciding to accept the marketing campaign?

Question 2.

Consider a firm that has EPS of $5 at the end of the first year, a dividend-payout ratio of 30%, a discount rate of 16%, and a return on retained earnings of 20%.

Question 3.

Prairie Book Publishers has EPS of $10 at the end of the first year, a dividend payout ratio of 40 percent, a discount rate of 16 percent, and a return on its retained earnings of 20 percent.

Question 4

As an example, consider Global Harmonic Control Systems (GHCS). Revenues, which are forecast to be $500 million in one year, are expected to grow at 10 percent per year for the two years after that, 8 percent per year for the next two years, and 6 percent per year after that. Expenses including depreciation are 60 percent of revenues. Net investment, including net working capital and capital spending less depreciation, is 10 percent of revenues. Because all costs are proportional to revenues, net cash flow (sometimes referred to as free cash flow) grows at the same rate as do revenues. GHCS is an all-equity firm with 12 million shares outstanding. A discount rate of 16 percent is appropriate for a firm of GHCSs risk. Assume tax rate as 40%.

1. Compute for the Price per share of GHCS
2. Using the P/E multiples, compute the price per share of GHCS( Assuming the P/E ratio of comparable firms in the GHCS industry is 7)