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Sem 2 2011 FINS3641 Sol Week 5

# Sem 2 2011 FINS3641 Sol Week 5 - FINS3641 SECURITY ANALYSIS...

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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%. • Pre-tax 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 t-1 t t-1 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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Sem 2 2011 FINS3641 Sol Week 5 - FINS3641 SECURITY ANALYSIS...

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