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# Kirk's Information Inc. Share Valuation

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9.3 You are considering an investment in the shares of Kirk's Information Inc. The company is still in its growth phase, so it won't pay dividends for the next few years. Kirk's accountant has determined that their first year's earnings per share (EPS) is expected to be \$20. The company expects a return on equity (ROE) of 25% in each of the next 5 years but in the sixth year they expect to earn 20%. In the seventh year and forever into the future, they expect to earn 15%. Also, at the end of the sixth year and every year after that, they expect to pay dividends at a rate of 70% of earnings, retaining the other 30% in the company. Kirk's uses a discount rate of 15%.

TABLE IS IN ATTACHED FILE

B. What would the dividend be in year 8?
C. Calculate the value of all future dividends at the beginning of year 8. (Hint: P7 depends on D8.)
D. What is the present value of P7 at the beginning of year 1?
E. What is the value of the company now, at time 0?

#### Solution Preview

Dear Student:

Please open the attached Excel Worksheet for the solution and then follow the explanations below:

A. Fill in the missing items in the following table:

See the table filled in Excel.

B. What would the dividend be in year 8?

Dividend in year 8 = \$5.93

In years 1-5 the company retains all earnings in the company and does not pay dividends, thus the ROE (return of equity) and the growth rate of the company are equal. Assuming that 70% of earnings will be paid out as ...

#### Solution Summary

This solution shows the detailed calculations of the current share valuation of Kirk's Information Inc. Kirk is a company in its growth phase, with higher expected returns of equity (ROE) during the first five years and a slower growth thereafter. The company starts paying dividends in year 6, using a 70% dividend payout rate and a 30% retention rate.

\$2.19

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What types of debt does Pier 1 Company have? Where did you find this information?

In addition to selling treasury stock, a company may use treasury stock when stock options are exercised or when debt is converted to stock. Pier 1 used some of its treasury shares to do this during 2000 and 2001. Where is this disclosed in the financial statements? Describe how the dollar amount of treasury shares on the comparative balance sheets decreased while, at the same time, the statement of cash flows shows cash outflow for the purchase of treasury shares.

Research and find a company to analyze. Prepare a report including the following information:

What is the history of this company? How did it begin? What differentiates this company from its competitors?

Compute the following ratios for this company:
current ratio
inventory turnover ratio
accounts receivable turnover ratio
debt to equity
return on assets
return on equity
gross margin on sales

What do these ratios indicate about the company?

Who would be interested in each of the ratios listed above? Why?

How well is this company doing? If possible, find the industry ratios for comparison.

What other information would be useful for investors and creditors in making economic decisions about this company?

Would you invest in this company?

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