SOLVED

21) Kiromi Inc. has reported income after tax of $3.2 million. It has 500,000 preferred shares outstanding at a value of $21.30 each and paying a dividend of $1.40. The company has one million common shares outstanding currently trading at $48.00 each. Breeson-Lee is not traded on the stock exchange but is comparable to Kiromi. If Breeson-Lee’s year-end earnings are $2.8 million, using P/E ratios as a guide, what is the company’s market value? A) $42.0 million B) $53.8 million C) $64.0 million D) $84.3 million E) $92.1 million 22) Which of the following situations may make the business valuation by the dividend yield method unreliable? A) Dividend policy governing payout is different for different companies. B) An exchange traded business tends to pay out smaller dividends than an unlisted business. C) Businesses that are not traded on the stock exchange do not pay out dividends. D) Businesses listed on an exchange are traded more frequently and, therefore, reflect new information more efficiently than unlisted businesses. E) Dividend payouts impact a business’s income tax payable, and, therefore, the business valuation, differently in different provinces. 23) Halifax Hatcheries Inc., an unlisted company, operates in the same sector, has common operational characteristics, and the same dividend payout policy, as Saleem Fingerlings Ltd. Saleem’s payout ratio is 32%. Salem’s year-end earnings were $12,150,000, at which time shares were priced at $10.80 per share with 2.4 million common shares outstanding. Using the dividend yield ratio method, what would be a reasonable estimation of the value of one Halifax Hatcheries Inc.’s common share if it has 1.5 million shares and earnings of $172,500,000? A) $10.80 B) $77.54 C) $153.15 D) $200.29 E) $245.33 24) Why is the dividend valuation method based on the concept that the present value of the future stream of dividends is an appropriate measure of a business’s value? A) The amount of dividends paid to shareholders is not discretionary and, therefore, is an objective measure of the value of the company to the shareholder. B) Shareholders purchase shares only for the returns represented by future dividends. C) Ultimately all value inherent in the company will be distributed as dividends. D) Companies usually offer a predictable payout of dividends and therefore dividends are the most reliable measure of wealth gained by the shareholder. E) The only cash returns from holding a business’s shares take the form of dividends. 25) Sarasota Co. Ltd. is an unlisted company with ownership concentrated in relatively few hands. It has experienced steady growth and forecasts dividend paid out to its 75,000 shareholders to grow by 5% per year from the base of $558,000 this year. If the company’s cost of capital is 9%, what is the value of a Sarasota share? A) $195.30 B) $148.00 C) $82.68 D) $14.80 E) $7.44 26) Reid Fittings and Fixtures Ltd. has forecasted free cash flows of $9.8 million, $10.2 million, $11.0 million, $11.4 million and $12.6 million over the next five years. Market value of bonds is $4.8 million and current value of the mortgage is $1.2 million. Reid has four million common shares outstanding and a discount rate of 7%. Using terminal value with a growth factor of 4% to account for cash flows beyond the planning horizon, what is the value of a Reid Fittings and Fixtures share? A) $9.68 B) $41.77 C) $84.55 D) $123.87 E) $186.05 27) An unlisted company has sales revenue of $456 million and 2 million common shares outstanding. Another company with similar characteristics, sales of $360 million and five million shares, trades on the Toronto Stock exchange for $12.50. Using the information from the question in an appropriate ratio, what is the share price of the unlisted company? A) $6.33 B) $15.26 C) $30.41 D) $39.58 E) $136.89 28) Canadian Adventurers Ltd., an unlisted company, provides equipment and guides for out-trippers, resource companies and emergency crews into the Canadian wildness. The 500 shares at an initial price of $750 each were divided equally between the bush pilot and a former forest ranger who operated the company. A year after the company was incorporated, when business was beginning to break-even, and several long-term contracts had just been signed, one of the owners died. The other owner would like to purchase the shares from the estate to continue the business. What is the most appropriate share valuation method? A) Dividend yield method. B) Free cash flow method. C) Balance sheet method. D) Price/earnings method. E) The original share value. 29) Haliburton Galleries Ltd. (HGL) is a small, but well established, fine art store. Unlisted and closely held, the company has 2,500 shares outstanding at an issue price of $350 and uses EVA for rewarding performance. The Board of Directors would like to determine the current value of the company’s shares as a guide to projecting the potential cash flow from a planned share issue. Year-end adjusted EBIT after tax equals $850,000, adjusted net assets equal $2.6 million, market value of debt is $900,000, retained earnings equal $940,000 and the company’s cost of capital is 14%. What is the value of a share in HGL? A) $215.20 B) $451.14 C) $497.14 D) $1,177.14 E) $1,537.14 30) Beryl Personnel Ltd. has a similar organizational structure, client base and growth as does Excel Temporary Services Inc. Both were established within six months of each other approximately five years ago. Book value for Beryl Personnel’s 500,000 common shares is $750,000. The company’s market capitalization is $2.25 million. Book value for Excel Temporary Services Inc.’s 100,000 shares is $600,000. Using the data provided and an appropriate ratio, what would Excel’s market capitalization be? A) $1,800,000 B) $2,250,000 C) $3,600,000 D) $4,500,000 E) $5,625,000