PROBLEM ONE
A financial analyst determines that Grant Company has $50 million of interest bearing debt outstanding and 3,800,000 common shares outstanding at the end of 2009. She also estimates that Grant's cost of debt is 6.55% and that its cost of equity using the capital asset pricing model is 9.72%. The company pays a $1.82 dividend and has a current stock price $29 per share. The company has a marginal income tax rate of 35%.
a. Compute Grant's average borrowing rate.
b. Compute the company's weighted average cost of capital.
c. Assuming that Grant's dividend will last into perpetuity what cost of equity capital is inferred by the current stock price?
d. Assuming that the financial analyst has properly calculated the cost of equity capital and that Grant will pay a dividend of $1.92 next year what growth rate is implied by the current stock price?
PROBLEM TWO
Use the income statements and balance sheets for Hooker Furniture. (See excel spreadsheet supplemental)
a) Calculate the following metrics for 2014 and comment briefly on what each one means:
a. Return on Equity
b. Operating Income Margin
c. Debt to Equity
d. Percent Used Up
e. Inventory Turnover
b) Create a common-sized Balance sheet and Income Statement for 2013 and 2014. Discuss any major changes between the two and what may have caused the differences.
PROBLEM THREE
Use the income statements and balance sheets for Darden Restaurants for the fiscal year ending May 28, 2008.(See excel spreadsheet supplemental )
a) Calculate the following metrics for 2008:
- Net operating profit after tax (NOPAT) - assume the statutory tax rate is 30%
- Net operating assets (NOA)
- Net nonoperating obligations (NNO)
- Sales growth (use this as short-term growth assumption for NOPAT and NOA in forecasts).
b) Use the residual operating income (ROPI) model to estimate the per share value of Darden Restaurant's equity, at May 28, 2008. The company's weighted average cost of capital is 8% and terminal growth rate is expected to be 3% (use 3 yr forecast horizon plus terminal value).
c) Use the Discount cash flow (DCF) model to estimate the per share value of Darden Restaurant's equity, at May 28, 2008. The company's weighted average cost of capital is 8% and terminal growth rate is expected to be 3%.
d) Darden Restaurant's shares closed at $36.52 per share on May 28, 2008. How does your valuation compare with this closing price?
Attachment:- Assignment Files.rar