Share price $25.00 Stockholders’ equity $100 million Retention rate 60% Return on equity (ROE) 10% Shares outstanding 10 million Expected sales $36 million Total operating expenses $17 million Operating expenses include $1,400,000 in depreciation and amortization P/CF ratio (using EBlTDA for cash How) is cLosest to: A. 12.25. B. 13.16. C. 15.71. D. -17.33
CF=(CFO-preferred dividends)/#shares outstanding CFO=Expected sales-total operating expenses+depreciation and amortization=36-17+1.4=20.4M CF=20.4/10=2.04$per share, P/CF=25/2.04=12.2549~12.25. Is it A?
I’m not always good at these problems, but I’ll take a stab at it. EBIT = Revenues - Operating Expenses (including D&A) = 36M - 17M = 19M EBITDA = EBIT + D&A = 19M + 1.4M = 20.4M EBITDA / Share = 20.4M / 10M shares = $2.04 / share P/CF = $25 / $2.04 = 12.25 Looks like answer A Now, what I’m not so sure about is that your revenues are forward looking (expected sales), whereas your operating expenses look like they might be historical. That means you might need to adjust by a growth factor. So what growth to use? growth = ROE * Retention rate = 10% * 60% = 6% But now how do operating expenses and D&A grow? If we grow operating expenses by 6% and D&A by 6%, we don’t get any of the answers If we grow operating expenses by 6% but D&A is historically flatlined, we don’t get any answers. If we shrink expected sales by 6% and use historical operating expenses and D&A, we don’t get any of the answers. I suspect that I’ve made a mistake here somewhere, but can’t find it, so I’ll say A. There is also something strange if stockholder equity is $100M and there are 10M shares outstanding. That suggests that the stock price should be $10, rather than $25.
Answer : A. EBITDAlshare = (36,000,000 - 17,000,000 + 1,400,000) I 10,000,000 = $2.04; P/CF = 25 12.04 = 12.25 What i m not able to understand here is that why do we need to add Depreciation and Amortization when it says in the question - Total operating expenses $17 million Operating expenses include $1,400,000 in depreciation and amortization
Because depreciation and amortization are non-cash expenses that are added back when calculating CFO.
oops that was so simple…just missed it. thanks map1
so the retention and ROE crap are distractors??
Yes, distractors. Going back to bchadwick’s comments: the current stock price reflects the expected earnings power, the projected, so there is no need to use the growth rate. E=A-L, it depends on assets and liabilities, not on the market value of the shares (which would be the market’s perception of projected earnings and a bunch of other things). You can calculate the market cap with that $25 price, nothing much beyond that. Overall, the question is crappy:)