Round your answer to 2 decimal places.)
P/E ratio

b.
What would the P/E ratio be if the discount rate were 10%?
(Round your answer to 2
decimal places.)
P/E ratio
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers
should be used for the actual calculations.
a.
Earnings = DIV
1
= $4
Growth rate =
g
= 0
P
0
=
$4
= $26.67
0.15 − 0
P/E = $26.67/$4 = 6.67
b.
If
r
= 0.10
P
0
=
$4
= $40 P/E increases to $40/$4 = 10.00.
0.10
Assume that market and book values are equal for current assets, current liabilities, and debt and
other long-term liabilities.

SIMPLIFIED BALANCE SHEET OF GOOD FORTUNES, INC. FOR MAY 31, 2010
(Millions of dollars)
Current assets
$
7,290
Current
liabilities
$
4,651
Plant,
equipment and
other long-term
assets
17,630
Debt and other
long-term
liabilities
6,452
Shareholders’
equity
13,817
Total assets
$
24,920
Total
liabilities and
equity
$
24,920
Note: Shares of stock outstanding: 320 million. Book value of equity (per share): 13,817/320 =
$43.18. The stock price is $77.50.
a.
Construct a market-value balance sheet from the above data.
(Be sure to list the assets and
liabilities in order of their liquidity. Enter your answers in millions rounded to 2
decimal places.)
SIMPLIFIED BALANCE SHEET OF GOOD FORTUNES, INC. FOR MAY 31
(Millions of dollars)
Current assets
$ Current liabilities
Plant, equipment and other long-
term assets
Debt and other long-term liabilities
Growth opportunities
Shareholders' equity

Total assets
$ Total liabilities and equity
b.
How much extra value shows up on the asset side of the balance sheet?
(Enter your answer
in millions rounded to 2 decimal places.)
Extra value on the asset side
$ million
Explanation:
The market value of shareholders' equity is found as the price per share ($77.50) multiplied by
the number of shares outstanding (320 million), or $24,800,000,000. An additional
$10,983,000,000 shows up on the asset side of the balance sheet ($24,800,000,000 −
13,817,000,000).
Grandiose Growth has a dividend growth rate of 10%. The discount rate is 8%. The end-of-year
dividend will be $5 per share.
a.
What is the present value of the dividend to be paid in year 1? Year 2? Year 3?
(Do not round
intermediate calculations. Round your answers to 2 decimal places.)
Present
Value
Year 1
$
Year 2
Year 3

Explanation:
a.
DIV
1
= $5.00
PV = $5/1.08 = $4.63
DIV
2
= $5(1.10) = $5.50
PV = $5.50/1.08
2
= $4.72
DIV
3
= $5(1.10)
2
= $6.05
PV = $6.05/1.08
3
= $4.80
Computer Corp. reinvests 50% of its earnings in the firm. The stock sells for $55, and the next
dividend will be $2.20 per share. The discount rate is 15%. What is the rate of return on the
company’s reinvested funds?
(Do not round intermediate calculations. Round your answer
to 2 decimal places.)
Rate of return
%
Explanation:
$55
=
$2.20
g
= 0.15 −
$2.20
= 0.11 = 11.00%
0.15 −
g
$55
g
= 0.11 = return on equity × plowback ratio = return on equity × 0.50
return on equity = 0.11/0.50 = 0.2200 = 22.00%

The following are the cash flows of two projects:
Year
Project A
Project B
0
−$270 −$270
1
150
170
2
150
170
3
150
170
4
150
a.
If the opportunity cost of capital is 12%, what is the profitability index for each project?
(Do
not round intermediate calculations. Round your answers to 4 decimal places.)
Project
Profitability Index
A
B
b.

#### You've reached the end of your free preview.

Want to read all 62 pages?

- Spring '14
- Depreciation, Net Present Value, decimal places, intermediate calculations