Question #24

of 135 Given an equity risk premium of 3.5%, a forecasted dividend yield of 2.5% on the market index and a U.S. government bond yield of 4.5%, what is the consensus long-term earnings growth estimate? A) 5.5%. B) 10.5%. C) 8.0%. Jakzach Corp. is a U.S.-based company. Exhibits 1–3 present the financial statements, which are prepared according to U.S. GAAP, and related information for the company. Exhibit 4 presents relevant industry and market data. Exhibit 1 Jakzach Corp. Summary Balance Sheets on 31 December (U.S. $ millions) 20x6 20x5 Cash $13.00 $5.87 Accounts receivable 30.00 27.00 Inventory 209.06 189.06 Current assets $252.06 $221.93 Gross fixed assets 474.47 409.47 Accumulated depreciation (154.17) (90.00) Net fixed assets 320.30 319.47 Total assets $572.36 $541.40 Accounts payable 25.05 $26.05 Notes payable 0.00 0.00 Current portion of long-term debt 0.00 0.00 Current liabilities $25.05 $26.05 Long-term debt 240.00 245.00 Total liabilities $265.05 $271.05 Common stock 160.00 150.00 Retained earnings 147.31 120.35 Total shareholders' equity $307.31 $270.35 Total liabilities and shareholders' equity $572.36 $541.40 Exhibit 2 Jakzach Corp. Summary Income Statement for the Year Ended 31 December 20x6 (U.S. $ millions) Revenue $300.80 Total operating expenses (173.74) Operating profit 127.06 Gain on sale 4.00 Earnings before interest, taxes, depreciation, and 131.06 amortization (EDITDA) Depreciation and amortization (71.17) Earnings before interest and taxes (EBIT) 59.89 Interest (16.80) Income tax expense (12.93) Net income 30.16 Exhibit 3 Jakzach Corp. Common Equity Data for 20x6 Dividends paid (U.S. $ millions) $3.20 Weighted average shares outstanding during 20x6 16,000,000 Dividend per share $0.20 Earnings per share $1.89 Beta 1.80 Note: The dividend payout ratio is expected to be constant. Exhibit 4 Industry and Market Data 31 December 20x6 Risk-free rate of return 4.00% Expected rate of return on market index 9.00% Median industry price/earnings (P/E) ratio 19.90 Expected industry earnings growth rate 12.00% The portfolio manager of a large mutual fund comments to one of the fund's analysts, Katrina Preedy: "We have been considering the purchase of Jakzach Corp. equity shares, so I would like you to analyze the value of the company. To begin based on Jakzach's past performance; you can assume that the company will grow at the same rate as the industry."