Question

1. Below are some of the components for Prufrock Corp. income statement for the year ending December 31t, 2016. Use the values to fill in the income statement and calculate the net income. All values are given in millions of dollars and there may be more lines provided than needed.

Sales $70,000
Tax Rate = 34%
Depreciation = $16,000
Interest Paid = $450
Cost of Goods Sold $35,000
Income Statement
Earnings Before Interest and taxes (EBIT)
Taxable Income (EBT)
Net Income
2. Prufrock Corp. has 4,000 million shares outstanding. If they do not reinvest any of their earnings what will be the dividend per share paid out this year?
3. Assume that the dividend from Part B will be paid out one year from today. After the initial dividend from part B is paid, the dividend is expected to grow at a rate of 4% per year. Investors require a 10% return on their investment, what is the current share price?

Answer 1

Answer and Explanation:

1. The computation of Earnings Before Interest and taxes, Taxable income and Net income is shown below:-

Earnings Before Interest = Revenue from sales - Cost of goods sold - Depreciation

= $70,000 - $35,000 - $16,000

= $19,000

Taxable Income = Earnings Before Interest - Interest paid

= $19,000 - $450

= $18,550

Net Income = Taxable Income - Taxes

= $18,550 - ($18,550 × 34%)

= $18,550 - $6,307

= $12,243

2. The computation of dividend per share is shown below:-

Dividend per share = Net income ÷ Number of shares outstanding

= $12,243 ÷ 4,000 million

= $3.06

3. The computation of current share price is shown below:-

Current share price = Current dividend ÷ (Expected return - Growth rate)

= $3.06 ÷ (10% - 4%)

= $3.06 ÷ 6%

= $51

Therefore we have applied the above formula.