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Calculating Price after stock split and ROE

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Question 1.Rooney Inc. recently completed a 3-for-2 stock split. Prior to the split, its stock price was $90 per share. The firm's total market value was unchanged by the split. What was the price of the company's stock following the stock split?

2.Firms A and B are identical except for their level of debt and the interest rates they pay on debt. Each has $2 million in assets, $400,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 50% and pays 12% interest on its debt, while Firm B has a 30% debt ratio and pays only 10% interest on its debt. What is the difference between the two firms' ROEs?

3. The firm's target capital structure is consistent with which of the following?
Maximum earnings per share (EPS).
Minimum cost of debt (rd).
Highest bond rating.
Minimum cost of equity (rs).
Minimum weighted average cost of capital (WACC). my answer

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Solution:

Question 1. Rooney Inc. recently completed a 3-for-2 stock split. Prior to the split, its stock price was $90 per share. The firm's total market value was unchanged by the split. What was the price of the company's stock following the stock split? my answer is 45.

Price of company's stock following split = Initial Price/Split ratio
Initial Price=$90
Split ratio=3/2
Price of company's stock following split = 90/(3/2)=$60

2.
Firms A and B ...

Solution Summary

There are three short problems. Solution to first problem explains the steps to calculate the price following the stock split. Solution to second problem calculates the difference in ROE's of two firms. Third one is a MCQ.

$2.19
See Also This Related BrainMass Solution

The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price on the stock. The company and its investment banks believe that the proper procedure is to select several similar firms with publicity traded common stock and to make relevant comparisons.
Several jewelry manufactures are reasonably similar to Edelman with respect to product mix, asset composition, and debt/equity proportions. Of these companies Kennedy Jewelers and Strasburg Fashions are most similar. When analyzing the following data, assume that 2002 and 2007 were reasonably "normal" years for all three companies-that is, these years were neither especially good nor especially bad in terms of sales, earnings, and dividends. At the time of the analysis, rRF was 8%and RPm was 4%. Kennedy is listed on the AMEX and Strasburg on the NYSE, while Edelman will be traded in the Nasdaq market.

Kennedy Strasburg Edelman (total).

Earning per Share
2007 $4.50 $7.50 $1,200,000
2008 3.00 3.50 816,000
Price per Share
2007 $36.00 $65.00 --------
Dividends per Share
2007 $2.25 $3.75 $ 600,000
2002 1.50 2.75 420,000
Book Value per Share,2007 $30.00 $55.00 $9. million
Market/book ratio 2007 120% 118% ------
Total assets, 2007 $28. million $82. million $20 million
Total debt, 2007 $121. million $30. million $11 million
Sales 2007 $41. million $140 million $37 million
The data are on a per share basis for Kenned and Strasburg, but are totals for Edelman.
A- Assume that /Edelman has 100 shares of stock outstanding. Use this information to calculate earnings per share (EPS), dividends per share (DPS), and book value per share for Edelman. (hint: Edelman's 2007 EPS = $12,000).
B- Calculate earnings and dividends growth rates for the three companies. (Hint: Edelman's EPS growth rate is 8%)
C- On the basis of your answer to part a, do you think Edelman's stock would sell at a price in the same "ballpark" as that of Kennedy and Strasburg, that is, in the range of $25 to $100 per share?.
D- Assuming that Edelman's management can split the stock so that the 100 shares could be changed to 1,000 shares, 100,000 shares, or any other number, would such an action make sense in this case? Why or why not?.
E- Now assume tha Edelman did split its stock and has 400,000 shares. Calculate new values for EPS, DPS, and book value per share. (Hint: Edelman's new 2007 EPS is $3.00)
F- Return on equity (ROE) can be measured as EPS/book value per hare or as total earnings/total equity. Calculate ROEs for the three companies for 2007. (Hint: Edelman's 2007 ROE is 13.3%).
G- Calculate dividend payout ratios for the three companies for both years. (Hint: Edelman's 2007 payout ratio is 50%).
H- Calculate debt/total assets ratios for the three companies for 2007. (Hint: Edelman's 2007 debt ratio 55%).
I- Calculate the P/E ratios for Kennedy and Strasburg for 2007. Are these P/Es reasonable in view of relative growth, payout, and ROE data?. If not what other factors might explain them? (Hint: Kennedy's P/E = 8x.)
J- Now determine a range of values for Edelman's stock price, with 400,000 shares outstanding, by applying Kennedy's and Strasburg's P/E ratios, price/dividends ratios, and price/book value ratios to your data for Edelman. For example, one possible price for Edelman' stock is (P/E Kennedy)(EPS Edelman) = 8($3) = $24 per share. Similar calculations would produce a range of prices based on both Kennedy's and Strasburg's data (Hint: range was $24 to $27.)
K- Using the equation rS =D1/Po + g, find approximate rS values for Kennedy and Strasburg. Then use these values in the constant growth stock price model to find a price for Edelman's stock. (Hint: We averaged the EPS and DPS g's for Edelman.)
L- At what price do you think Edelman's shares should be offered to the public? You will want to select a price that will be low enough to induce investors to bu the stock but not so low that it will rise sharply immediately after it is issued. Think about relative growth rates, ROEs, dividend yields, and total returns (rS = D1/P0 + g)

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