Question 3

PART A Utilize the 2021 financial statements for Virtuoso Corporation provided on page 2 and assume that the company is currently operating at full capacity.

Required: Prepare Pro-Forma statements for the year ending June 30, 2022 (rounding all figures to the nearest dollar) assuming:

All costs/income/expenses and net working capital vary directly with sales/revenue. No new equity is raised. Sales are projected to increase by 20%. The tax rate and the dividend payout ratio will remain constant.

Interest Expense will remain unchanged. Clearly state if Virtuoso Corporation will require external financing or if the company would have excess financing in 2022, and how much.

PART B

Based on the results of the pro-forma statement in part A above, Virtuoso is considering raising financing though the sale of additional common shares. The Finance Manager is however seeking to determine if the current value of its stock is fairly priced.

The following anticipated dividend payout structure information is provided:

Virtuoso is expected to pay dividends of $5.00 next year, after which it will decline consistently to $3.50, $2.50 and $2.00 respectively over years 2 to 4.

Thereafter, the company is expected to increase dividends by an annual rate of 4%.

The company currently assumes a required return of 9%, for simplicity.

Required: Given the above, what should be the current price of Virtuosos common shares?