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?

Virtuoso Corporation Income Statement For the year ended June 30, 2021 Sales Cost of Goods Sold Gross Profit Selling & Marketing Costs Admin. Expenses Depreciation Expense Earnings before Interest & Taxes Interest Expense Taxable income Taxation (30%) Net Income 4997501 2021 ("000s) 10,700 (4.320) 6,380 (380) (1,050) (250) 4,700 (120) 4,580 (1,374) 3,206 Dividends (35%) Addition to Retained Earnings 1,122 2,084 Virtuoso Corporation Statement of Financial Position As at June 30, 2020 & 2021 2020 (000) 2021 C000s) 2020 ('000s) 2021 ('000s) ASSETS Current Assets Inventories Accounts Receivables Cash & Equivalents 3,200 2,000 3,500 8,700 LIABILITIES & EQUITY Current Liabilities Accounts Payables Notes Payables 2,800 2,200 4.525 9,525 2,500 2,300 4,800 1,750 2,500 4.250 3,000 2,900 Non Current Assets, Net 5,300 6,009 Non-current Liabilites Total Liabilities 7,800 7,150 Equity Common Stock Retained Earnings Total Equity 1,500 4,700 6,200 1,600 6,784 8,384 TOTAL ASSETS 14,000 15,534 TOTAL LIAB. & EQUITY 14,000 15,534 Virtuoso Corporation Income Statement For the year ended June 30, 2021 Sales Cost of Goods Sold Gross Profit Selling & Marketing Costs Admin. Expenses Depreciation Expense Earnings before Interest & Taxes Interest Expense Taxable income Taxation (30%) Net Income 4997501 2021 ("000s) 10,700 (4.320) 6,380 (380) (1,050) (250) 4,700 (120) 4,580 (1,374) 3,206 Dividends (35%) Addition to Retained Earnings 1,122 2,084 Virtuoso Corporation Statement of Financial Position As at June 30, 2020 & 2021 2020 (000) 2021 C000s) 2020 ('000s) 2021 ('000s) ASSETS Current Assets Inventories Accounts Receivables Cash & Equivalents 3,200 2,000 3,500 8,700 LIABILITIES & EQUITY Current Liabilities Accounts Payables Notes Payables 2,800 2,200 4.525 9,525 2,500 2,300 4,800 1,750 2,500 4.250 3,000 2,900 Non Current Assets, Net 5,300 6,009 Non-current Liabilites Total Liabilities 7,800 7,150 Equity Common Stock Retained Earnings Total Equity 1,500 4,700 6,200 1,600 6,784 8,384 TOTAL ASSETS 14,000 15,534 TOTAL LIAB. & EQUITY 14,000 15,534