Question: Capital Experts, Ltd., (CEL) specializes in taking underperforming companies to a higher level of performance. CELs capital structure at December 31, 2011, included 14,000 shares

Capital Experts, Ltd., (CEL) specializes in taking underperforming companies to a higher level of performance. CEL’s capital structure at December 31, 2011, included 14,000 shares of $2.25 preferred stock and 115,000 shares of common stock. During 2012, CEL issued common stock and ended the year with 123,000 shares of common stock outstanding.
Average common shares outstanding during 2012 were 119,000. Income from continuing operations during 2012 was $235,000. The company discontinued a segment of the business at a loss of $69,000, and an extraordinary item generated a gain of $46,000. All amounts are after income tax.

Requirements
1. Compute CEL’s earnings per share. Start with income from continuing operations.
2. Analysts believe CEL can earn its current level of income for the indefinite future. Estimate the market price of a share of CEL common stock at investment capitalization rates of 9%, 11%, and 13%. Which estimate presumes an investment in CEL is the most risky? How can you tell?

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