VINYL RECORDS EXTRA INCOME

The LEDZEP management team brings you into a meeting to ask you for your financial expertise to help them with an important decision. They want to know what to should do with their internally generated income?

You review the data you have: LEDZEP Incorporated stock price is at $14.50. They are a growing vintage vinyl records company with 250 stores across the country. During 2020, their net income hit $160,00. The CEO tells you they have a growth rate of 6% in dividends and earnings and they are in a relatively high 40% tax bracket. Last year, they paid out a dividend of $0.35. They share with you their net worth statements and you see they have a retained earnings of $500,000 and common stock of $1,800,000 at the beginning of 2020.

As you go though their statements and do extra research, you read that entertainment industry analysts project that Vinyl records are just a temporary fad and that growth rate might turn into decline when vinyl again goes out of fashion.

SOLVE and ANALYZE:

3. Calculate the following projections for the execs:

3A) What would LEDZEP ROI have to earn in order to account for retaining earnings? 3B) What would happen in LEDZEP's statement of net worth if a $0.25 cash dividend was paid? What if a five percent stock dividend were given and no cash dividend was paid? 3C) LEDZEP's EPS before and after the stock dividend?

(15 marks)

3D. Based on your numbers and calculations, justify the decision criteria of what should be done with the interally generated funds. Outline important factors in making this decision using a systems thinking approach. Are there any other financial considerations they should be aware of based on the present numbers and future state of the market?

(10 marks)

Total: 25 marks