In this Modern Furniture Company case, there are relative issues to be tackled in order to implement strategic and long-term planning that will enable the company to stand firm amidst all crisis that will come its way. The primary concern of the Board of Directors and Executive Committee is to ensure the companys long-term survival (CourseSmart, 2010). The most important aspect of a companys existence is the proper management of its finances. It is the responsibility of Financial Management to allocate funds to current and fixed assets, to obtain the best mix of financing alternatives, and to develop an appropriate dividend policy within the context of the firms objectives (McGraw-Hill, 2008).
The financial statements of a company are important because these are used by the Management in making decisions. The analysis of these financial statements however, involves the examination of relationships among financial elements and making comparisons with relevant information. Ratio analysis is the most common form of financial analysis. It provides relative measures of the companys conditions and performances (Answers.com, 2009). To apply the financial statement analysis, let us take into account Modern Furniture Company whose Chief Financial Officer, Al Rosen is taking into consideration stock repurchasing as against cash dividend issuances. He needs to perform the following calculations before he can made recommendations to the CEO and the Board of Directors. (Data based on the Complete Modern Furniture Company case)
a.) What is the firms PE ratio The Price-Earnings Ratio (PE) is the measure of how expensive a stock is. It is a valuation of the companys current share price compared to its per-share earnings. It is calculated as the market value per share divided by the companys EPS (Earnings per share).
PE Ratio 88.00 (market value per share) 4.00 (EPS)
22 means that the investors are willing to pay 22 times per dollar of earnings.
In general, a high PE suggests that investors are expecting higher earnings growth in a company as compared to companies having lower PE ratio (Investopedia, 2010). But it is important to note that PE ratios are useful when compared to companies of the same industries but it is not useful when compared to companies that belong to different industries.
b.) If the firm paid the cash dividend, what would be its dividend yield and
dividend payout ratio per share
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock (Investopedia, 2010). Dividend yield is calculated as follows
Dividend yield 1.60 (dividends per share) 88.00 (price per share)
1.80 that a company will payout in dividends in
relative to its share price.
Dividend payout ratio is the percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments (Investopedia, 2010). It is calculated as follows
Dividend payout ratio 1.60 (dividend per share) 4.00 (EPS)
40 is the percentage of earnings to be paid to
shareholders in dividends.
c.) If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio (stock plus dividends) The total value of the stockholders portfolio is 8,960.00 computed as follows
Market value of stocks (100 shares 88.00) 8,800.00
Add Dividends (100 shares 1.60) 160.00
-------------
Total value of portfolio 8,960.00
d.) Assume instead of paying the cash dividend, the firm used the 4.8 million of excess funds to purchase shares at slightly over the current market value of 88.00 at a price of 89.60. How many shares could be repurchased (Round to the nearest share) The shares that could be repurchased are 53,571 shares computed as 4.8 million divided by 89.60.
e.) What would the new earnings per share be under the stock repurchase alternative The new EPS would be 4.073 calculated as net income which is 12 million divided by outstanding shares less stock repurchased (3,000,000 shares 53,571 shares 2,946,429 shares).
f.) If the PE ratio stayed the same under the stock repurchase alternative, what would be the stock value per share If a stockholder owned 100 shares, what would now be the total value of his portfolio Considering PE ratio is the same under stock repurchase alternative, the stock value per share would be 89.606 computed as PE ratio of 22 multiplied by the new EPS which is 4.073, the result is 89.606. The stockholders total portfolio value would be 8,960.60.
From this observations, one can see that because of the stock repurchased alternative, even though the outstanding shares were reduced, there was an increase in the earnings per share (EPS) and eventually an increase in the market value of the remaining shares. This kind of decision is very important for the Board of Directors and Executive Committee because from this action, they would be able to intensify their long-term plan strategies that would benefit not only the company but also its Management and employees. Repurchasing ones stocks is a form of investment in your own company.
The financial statements of a company are important because these are used by the Management in making decisions. The analysis of these financial statements however, involves the examination of relationships among financial elements and making comparisons with relevant information. Ratio analysis is the most common form of financial analysis. It provides relative measures of the companys conditions and performances (Answers.com, 2009). To apply the financial statement analysis, let us take into account Modern Furniture Company whose Chief Financial Officer, Al Rosen is taking into consideration stock repurchasing as against cash dividend issuances. He needs to perform the following calculations before he can made recommendations to the CEO and the Board of Directors. (Data based on the Complete Modern Furniture Company case)
a.) What is the firms PE ratio The Price-Earnings Ratio (PE) is the measure of how expensive a stock is. It is a valuation of the companys current share price compared to its per-share earnings. It is calculated as the market value per share divided by the companys EPS (Earnings per share).
PE Ratio 88.00 (market value per share) 4.00 (EPS)
22 means that the investors are willing to pay 22 times per dollar of earnings.
In general, a high PE suggests that investors are expecting higher earnings growth in a company as compared to companies having lower PE ratio (Investopedia, 2010). But it is important to note that PE ratios are useful when compared to companies of the same industries but it is not useful when compared to companies that belong to different industries.
b.) If the firm paid the cash dividend, what would be its dividend yield and
dividend payout ratio per share
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock (Investopedia, 2010). Dividend yield is calculated as follows
Dividend yield 1.60 (dividends per share) 88.00 (price per share)
1.80 that a company will payout in dividends in
relative to its share price.
Dividend payout ratio is the percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments (Investopedia, 2010). It is calculated as follows
Dividend payout ratio 1.60 (dividend per share) 4.00 (EPS)
40 is the percentage of earnings to be paid to
shareholders in dividends.
c.) If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio (stock plus dividends) The total value of the stockholders portfolio is 8,960.00 computed as follows
Market value of stocks (100 shares 88.00) 8,800.00
Add Dividends (100 shares 1.60) 160.00
-------------
Total value of portfolio 8,960.00
d.) Assume instead of paying the cash dividend, the firm used the 4.8 million of excess funds to purchase shares at slightly over the current market value of 88.00 at a price of 89.60. How many shares could be repurchased (Round to the nearest share) The shares that could be repurchased are 53,571 shares computed as 4.8 million divided by 89.60.
e.) What would the new earnings per share be under the stock repurchase alternative The new EPS would be 4.073 calculated as net income which is 12 million divided by outstanding shares less stock repurchased (3,000,000 shares 53,571 shares 2,946,429 shares).
f.) If the PE ratio stayed the same under the stock repurchase alternative, what would be the stock value per share If a stockholder owned 100 shares, what would now be the total value of his portfolio Considering PE ratio is the same under stock repurchase alternative, the stock value per share would be 89.606 computed as PE ratio of 22 multiplied by the new EPS which is 4.073, the result is 89.606. The stockholders total portfolio value would be 8,960.60.
From this observations, one can see that because of the stock repurchased alternative, even though the outstanding shares were reduced, there was an increase in the earnings per share (EPS) and eventually an increase in the market value of the remaining shares. This kind of decision is very important for the Board of Directors and Executive Committee because from this action, they would be able to intensify their long-term plan strategies that would benefit not only the company but also its Management and employees. Repurchasing ones stocks is a form of investment in your own company.
No comments:
Post a Comment