ABC Plumbing Corp. and Income/Balance sheet . Using the various ratios and assumptions project the stock price
Question:
ABC Plumbing Corp. and Income/Balance sheet . Using the various ratios and assumptions project the stock price for the case study company and new issues of stock based on the statements. Be sure to include the following: Incorporate and update the information given in Table 1 to reflect the changes for the upcoming year Prepare the income statement and balance sheet for next year based on these assumptions: (a) cash, fixed assets, payables and accruals will grow with sales; (b) the current composition of interestbearing debts, which includes short-term bank loans and long term bonds, will be maintained for next year; (c) a tax rate of 40%; (d) 10% interest rate on all interest-bearing debts; (e) 50 million common shares outstanding The current market price of ABC’s common stocks is at $23.05. If all assumptions are realized, what is your estimate for ABC’s stock a year from now based on today’s P/E ratio? If the growth rate of ABC next year is only 6%, but all other assumptions are maintained, what will ABC’s stock price be? If this growth rate turns out to be a better-than-expected rate of 12%, how much will this stock be worth a year from now based on this model?
Table 1: Selected Ratios: ABC Plumbing, INC. and Its Industry
ABC: Current Year | Industry | |
Operating Costs/Sales | 93.33% | 88.50% |
Receivables/Sales | 11.67% | 8.88% |
Inventories/Sales | 20.00% | 9.12% |
Liability Assets | 35.00% | 25.00% |
Payout Ratio | 28.99% | 22.00% |
Table 2: Income Statement & Balance Sheet
Income Statement | Current Year |
Sales | |
| Income Statement (in millions) | Current Year | |
| Sales | $3,000.00 | |
| Operating Costs | $2,800.00 | |
| Earning before interest and tax (EBIT) | $200.00 | |
| Less interest expense | $85.00 | |
| Earning before tax | $115.00 | |
| Taxes | $46.00 | |
| Net income | $69.00 | |
| Dividends | $20.00 | |
| Addition to retained earning | $49.00 | |
| Balance Sheet (in millions) | Current Year | |
| Asset | ||
| Cash | $50.00 | |
| Accounts receivables | $350.00 | |
| Inventories | $600.00 | |
| Fixed Assets | $1,000.00 | |
| Total Assets | $2,000.00 | |
| Liabilities and Equity | ||
| Payables + Accruals | $200.00 | |
| Short-term bank loans | $100.00 | |
| Total current liabilities | $300.00 | |
| Long-term bonds | $750.00 | |
| Total liabilities | $1,050.00 | |
| Common Stock | $150.00 | |
| Retained earnings | $800.00 | |
| Total common equity | $950.00 | |
| Total liabilities and equity | $2,000.00 | |
Expert Answer:
Fundamental Financial Accounting Concepts
ISBN: 978-0078025907
9th edition
Authors: Thomas Edmonds, Christopher Edmonds
