Reference no: EM132975774
Question - IN ITS TENTH YEAR of operation, STORM ARMADA Company has the following data
Equity Ratio 80%
Margin of study 50%
Contribution Margin Ratio 40%
Sales p 3,000,000
Average Total Assets p 12,000,000
Dividend per share P 0.25
Earnings Per share p 3.20
Market Value of stock p 20.00
The president and the directors are not satisfied with the current growth rate of the company which is below the industry standards. They believe that this could be increased to 6.25% by taking on additional leverage (both operating and financial) by purchasing an operating asset that would significantly change the structure of the company's operating costs. This together with coming up of good dividend policies to improve the retention rate, would be more practical as of this point because all possible markets have been penetrated and the demand for the company's products and services is estimated to remain for the next 6 to 8 years. Being conservative on their estimates for the following years, the company would still maintain the same level of expected sales and net profit margins, but with the following changes.
Equity Ratio from 80% to 60%
Contribution Margin Ratio from 40% to 50%
Average Total Assets (new) P15,000,000
Earnings per share p3.20
Estimated market value of stock (based on dividend valuation model) p25.00
Book Value of the stock p12.50/ share
Required -
a) Assume that you are an owner of several hundred shares of STORM ARMADA Company's stock, are you going to retain, sell, or buy more of the company's sock? Defend your answer by siting and interpreting indicators.
b) Compute the growth rate and the price Earnings before the strategies proposed above were implemented by the board and the president.
c) Compute for the dividend per share and debt ratio that would accompany the proposed changes of the board and directors.
d) What are the advantages and disadvantages of the following changes in the company as a whole? Why do you say so? Explain (substantiate you answers by identifying your indicators)