FINS3641 Tutorial Solutions: Peter Andersen, Eileen Kang
FINS3641: Security Analysis and Valuation Week 5 Solutions
1
FINS3641:
S
ECURITY
A
NALYSIS AND
V
ALUATION
Week 5 Solutions
CHAPTER
XI
—PROBLEM
2
BIC Corporation reported a ROE of 20% and paid out 37% of its earnings as dividends in the
most recent year.
A. Assuming these fundamentals don’t change, estimate the expected growth rate in
earnings per share.
B. Assume that the ROE will change to 25% on both new and existing investments from next
year. Estimate the expected growth rate in EPS.
A.
B.
CHAPTER
XI
—PROBLEM
5
InVideo Inc. is an online retailer of videos and DVDs.
• The firm reported an operating loss of $10m on revenues of $100m in the most recent
financial year.
• Revenue growth will be 100% next year, then 75% the following year, then 50%, 30% and
30%.
• Pretax operating margin will improve to 8% of revenues by year 5.
Estimate the expected revenues and operating income/loss for each of the next five years
using:
1.
the arithmetic average method
2.
a linear change.
(
(
29
t
t
Growth
ROE
1
Dividend Payout Ratio
ROE
Retention Ratio
20%
(1
37%)
12.60%
=
×

=
×
=
×

=
(
29
t
t1
t
t1
ROE
ROE
Growth
ROE
Retention Ratio
ROE
25%
20%
25%
(1
37%)
20%
40.75%

=
×
+

=
×

+
=
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FINS3641 Tutorial Solutions: Peter Andersen, Eileen Kang
FINS3641: Security Analysis and Valuation Week 5 Solutions
2
Year
Revenue
Growth
Revenues
Operating
Margin linear
Operating
Margin Arith
Average
EBIT
(Linear)
EBIT
(AA)
0
100
10%
10%
$
10.00
$
10.00
1
1
200
6.400%
1.00%
$
12.80
$
2.00
2
0.75
350
2.800%
3.50%
$
9.80
$
12.25
3
0.5
525
0.800%
5.75%
$
4.20
$
30.19
4
0.3
682.5
4.400%
6.88%
$
30.03
$
46.92
5
0.3
887.25
8%
8%
$
70.98
$
70.98
See attached excel spreadsheet to see how this table was made.
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 Revenue, Valuation, Generally Accepted Accounting Principles, Eileen Kang

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